IRD hits firms' clients for tax owed

Experts are worried that companies' liquidity could be affected by the IRD's decision. Photo / Herald on Sunday

Inland Revenue is making use of a draconian part of the law to collect unpaid tax.

As the tax take falls and companies find themselves struggling to meet their commitments, the IRD is issuing deduction notices to businesses' clients - meaning that rather than paying their bills to the supplier, the client is ordered to make payments directly to the IRD until informed otherwise.

Insolvency specialist Kerryn Downey of McGrath Nicol says he knows of two cases in the past six months where this has happened to reasonably large companies.

The deduction notices were withdrawn, but if they had not been it would almost certainly have resulted in the companies falling over with the loss of a significant number of jobs, Downey said.

He believes the taxman is firing a serious warning across businesses' bows, saying that if they fall into arrears and do not come to an arrangement the IRD will do what it has to do to get paid. "I think that's the message loud and clear."

McGrath Nicol has been concerned enough to send out a warning letter to bankers about the situation. "In the event the IRD adopts this practice ... on a wider scale, a company's liquidity will be seriously affected, financial restructurings may be destabilised, and banks may have to appoint receivers to protect their security and priority," it said.

The action would appear to be the flip side of the IRD's recent public relations efforts to assure New Zealand businesses that it was here to help if they got into trouble - as long as they came forward with their problems.

Last week the IRD for the first time issued details of the tax compliance areas it intended to focus on in the coming year. Commissioner of Inland Revenue Bob Russell said it hoped getting the message out would help.

The IRD gets its power to issue deduction notices under section 157 of the Tax Administration Act, and there is a similar provision in GST legislation.

Downey said that in one of the recent cases the company had got into serious arrears with its PAYE and GST requirements, and had not negotiated an arrangement with the IRD.

The tax department asked for details of its clients as it is entitled to do, and served deduction notices.

The flow of funds to the company dried up and its bankers, who had not been aware of the situation, called in the receivers.

An interim agreement was reached and the receivership averted. But it does not stop the IRD reissuing notices if the situation sours again, Downey points out.

Bell Gully insolvency specialist Murray Tingey said it demonstrated the IRD's increased vigilance in trying to recover tax payments.

There had been particular concerns about GST owed by property developers on properties they had sold.

There were "complicated priority issues" in terms of whether the IRD or a secured creditor was ahead in the queue when a company failed, and use of this provision was a way of the IRD making sure it got its money. "There are certainly cases where [use of S157] would be appropriate."

An IRD statement said a deduction notice was an important recovery tool, and it was exercised when other attempts to resolve the issue had not been successful.

"We urge any businesses or individuals who may have difficulty meeting their obligations to talk to us as early as possible so we can discuss the options with them."

* Falling tax take

Budget forecasts

2009 $54.1b

2010 $51.6b

2011 $51.8b

2012 $54.6b