Andrew Tringham shares his thoughts on what businesses should do if they can’t make their tax payments in full.
Like many of the best quotes, the origin of this one has been lost to the winds of time. However, its words have never been more appropriate in today’s environment. As anybody who’s run a business knows, “cash flow is everything”. Many New Zealand businesses are feeling the full force of the COVID-19 impacts and it is becoming increasingly difficult to pay creditors, including Inland Revenue.
So, what should businesses do if they can’t make their tax payments in full? Over the past few weeks Inland Revenue has made several announcements about COVID-19 related tax relief. These announcements have not always been clear, but the overarching message is that taxpayers should be treating Inland Revenue as another creditor that expects to still be paid, but IRD may grant some relief or payment arrangements, if certain conditions are met. I have addressed common considerations below.
If you know you are not going to be able to make a tax payment, the best thing you can do it tell Inland Revenue as soon as possible. This will start an open conversation with Inland Revenue about getting your compliance back on track, including options for relief. The earlier you contact Inland Revenue, the more likely relief will be granted.
It is important that if you can pay your taxes on time, that you continue to do so. The special relief provision only applies to taxpayers that have been significantly adversely affected by the COVID-19 outbreak. For tax payments due on or after 14th February 2020, Inland Revenue now has the discretion (by law) to remit use-of-money-interest (“UOMI”) where you’re physically or financially unable to make a tax payment on time. That relief is available only once the core tax has been paid in full. Inland Revenue has also indicated that it will remit shortfall penalties.
Inland Revenue must be satisfied that the ability to make a tax payment on time has been significantly adversely affected by the COVID-19 outbreak. In other words, whilst Inland Revenue is showing leniency, and we would expect Inland Revenue to take taxpayers at their word more than they normally would, you will still need to be able to show a direct cause and effect relationship between the adverse economic impact of COVID-19 on your cash flows, and the inability to make tax payments (i.e. thorough disruptions to labour force, decrease in customers and productivity etc). We note that these relaxed measures will not apply to non-COVID related late payments.
Generally, Inland Revenue imposes late filing penalties on taxpayers who fail to file a tax return on time (and usually after Inland Revenue has sent a reminder). Given the current climate, Inland Revenue has indicated it will “be flexible” regarding filing obligations and has been given additional discretion to vary due dates and deadlines for taxpayers affected by COVID-19. On that basis, it is unlikely any late filing fees will be imposed where a tax payer has limited access to necessary papers and systems due to COVID-19. Inland Revenue has also indicated that for the most part, 2019 income tax returns filed after 31 March 2020, but before 31 May 2020, will be treated as having been filed on 31 March 2020 for the purposes of the time-bar.
Businesses unable to pay their taxes as they fall due may be able to negotiate an instalment arrangement with Inland Revenue. Interest and penalties will continue to accrue. However, when the arrangement is completed and on the basis that you meet the requirements for the COVID-19 remission, Inland Revenue has advised that interest will be automatically cancelled without the need to apply to have it remitted.
If you have existing instalment arrangements with Inland Revenue that you may no longer be able to meet, Inland Revenue has indicated it will be open to renegotiating these arrangements to reflect the current economic climate and your current situation. Similarly, if you have existing tax arrears, Inland Revenue will be open to negotiating instalments arrangements for these too.
If you are in a position where you have multiple tax payments to make, we recommend prioritising PAYE before GST and Income Tax. As an employer, you are responsible for withholding and paying PAYE on your employees’ behalf, and the PAYE belongs to the employee, not you. In our experience, Inland Revenue looks more favourably on taxpayers that are up to date on their PAYE payments.
We know it is a challenging and uncertain time for all businesses in New Zealand. Approaching Inland Revenue can be daunting, especially if this is the first time you’ve paid tax late.
As experts in tax compliance and client debt management, we have built a strong working relationship with Inland Revenue. Throughout this time, we endeavour to prioritise and look out for those clients and taxpayers who are wanting assistance in managing this process.
We expect further measures and guidance to be announced by Inland Revenue for New Zealand taxpayers, but in the meantime, please do not hesitate to get in touch.
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