Many New Zealand businesses are feeling the impact of New Zealand’s slow economy. Our April BDO Business Wellbeing Index shows business leaders feel less positive about their business financials than they have in the past two years, with cash flow a major concern for many.
When times are hard, businesses may find themselves prioritising their finances and determining which creditors to pay first. While this can be a difficult decision, it’s essential to consider who you are legally and morally obliged to make payment to - including Inland Revenue.
The role of Inland Revenue
Inland Revenue has two main duties:
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Firstly, to protect the integrity of the tax system; and
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Secondly, to collect over time the highest net revenue practicable within the law.
Broadly, this means they need to be fair and collect money efficiently. These duties are important when considering Inland Revenue’s position on debt owed by the taxpayer.
Prioritising payment
When funds are tight, businesses may need to make careful decisions about which creditors to pay, and when. While it can be tempting to prioritise paying the ‘squeakiest wheel,’ major suppliers and those who could interrupt your operations, it’s important to consider all your debt and the creditors you are obliged to pay.
Inland Revenue may not make the most noise and for some businesses, they may not always be at the top of the list when it comes to thinking about debt and prioritisation – but tax obligations must always be met. This is especially important given the $29 million allocated for compliance in this year’s Budget, which Inland Revenue has said it will use to target people who have not met their tax obligations. Inland Revenue has indicated that they are focusing on tax debt owed by businesses in the construction industry, and businesses who took out the small business cashflow scheme loans.
We covered the role of fairness for Inland Revenue above. For business leaders, it’s equally important to be fair in meeting your tax obligations. If you practise fairness when dealing with Inland Revenue, you may find you receive fairness in return.
Practical tips for dealing with Inland Revenue debt
With this in mind, here are some practical tips for dealing with Inland Revenue debt.
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PAYE and GST are considered to be funds held on trust for Inland Revenue, so prioritise the payment of these tax debts.
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Hit it head on. Contact Inland Revenue sooner rather than later - they are there to help taxpayers with managing compliance and can assist with an instalment arrangement.
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Interest and late payment penalties will accrue on overdue tax debt. Have upfront discussions with Inland Revenue about financial relief and instalment arrangement, as timely application may result in fewer penalties being applied.
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Any instalment arrangement to make good the debt over time must be realistic and should take into account the need to keep up to date with your current tax liabilities.
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Explain the reasons for the predicament. This is important. For example, if the business is suffering because of personal spending, this is different from a significant downturn in the market and a fall in revenues.
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Serious financial hardship relief may be available for sole-trader individuals if paying the tax debt will result in them being unable to meet daily minimum living expenses, medical expenses or pay for education costs of their children. In such situations, Inland Revenue may agree to write off an amount of tax debt.
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Stand in the shoes of Inland Revenue. What could the Commissioner expect to receive if they closed the business down and liquidated the assets, versus continuing operations?
Finally, it’s important to remember that when you’re dealing with Inland Revenue, you’re dealing with people. This can be easily forgotten in the increasingly technical world of chat bots, emails and AI. Keep this ‘people’ element top of mind - respond, don’t bend the truth, and do what you say you’re going to do; there’s a lot more greyness in this than “0s” and “1s”.
If you’d like any assistance meeting your tax obligations, reach out to your BDO adviser or find out more about our tax services here.