PAYE Deductions are Not Your Business's Money

When you pay staff, you are required to deduct certain amounts from their wages (such as PAYE, KiwiSaver contributions, and student loan repayments) and pass those amounts on to Inland Revenue. Although the money moves through your business bank account, it is not business income.  It belongs to your employees and the tax system.  Inland Revenue has recently made it very clear that failing to pass these deductions on is treated as a serious issue, not an administrative slip.

Inland Revenue is Taking a Harder Line

Yesterday, Inland Revenue issued a formal warning to employers about situations where PAYE and other deductions are taken from staff pay, but then used for other purposes - for example, to manage cashflow pressures, pay suppliers, or keep the business running.  The message in Revenue Alert 26/01 is simple: once deductions are made from wages, they must be paid to Inland Revenue on time. Choosing to use that money elsewhere can put business owners and directors at personal risk, including criminal prosecution.

One of the most important points for business owners to understand is that this is not just a “company problem”.  Inland Revenue has made it clear that directors and others involved in the decision not to pay deductions can be held personally accountable.  That means:

• It is not a defence to say the business was struggling;

• It is not enough to say you intended to catch up later;

• Directors and decision-makers can be targeted individually.

This reflects Inland Revenue’s view that PAYE deductions are held on trust and deliberately diverting them undermines the integrity of the tax system.

Cashflow Pressure is Common – PAYE is not the Solution & Consequences can be Severe

Many small and medium-sized businesses experience cashflow stress, especially in tough economic conditions as we have been experiencing.  Inland Revenue acknowledges that pressures exist, but is now emphasising that using employee deductions as short-term funding is not acceptable.  If your business is struggling to meet its tax obligations, the safer option is to engage early – whether that is seeking professional advice, talking to Inland Revenue about a payment plan, or making a voluntary disclosure if mistakes have already occurred.  You can read more about managing tax debt in this article and this article.

Failing to pay PAYE deductions is not treated like a late filing or a missed payment penalty.  Inland Revenue has highlighted that this behaviour can lead to significant penalties and, in serious cases, criminal consequences.  This is a clear signal that enforcement in this area is increasing and that Inland Revenue is prepared to take strong action where it believes deductions have been deliberately withheld.

What Business Owners Should Do Now

If you employ staff, this is a good time to review your processes and make sure:

• PAYE and other deductions are calculated correctly;

• Deductions are paid to Inland Revenue by the due dates; and

• Cashflow planning does not rely on unpaid tax.

If there are existing issues, getting advice early can make a real difference to the outcome.

If you’re unsure whether this applies to your business, or you’re concerned about past PAYE payments, professional advice can help you understand your position and your options.  If there is any risk that PAYE deductions have not been paid on time, seeking advice from a tax lawyer can be critical, particularly where directors may face personal exposure.

At Johnston Law we have years of experience with Inland Revenue and can assist you to understand your position, assess risk, and deal with Inland Revenue strategically.  Importantly, discussions with a lawyer are protected by legal privilege which is not the case with accountants.  This means you can speak openly about what has happened and explore your options confidentially, without those communications needing to be disclosed to Inland Revenue.

We assist business owners and directors with all communications with Inland Revenue, with a focus on protecting individuals as well as the business - and resolving matters before they escalate.

This article is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact us.

This article was accurate at the time of publishing.