With the availability of government subsidies becoming harder to obtain the Inland Revenue Department (IRD) and Ministry of Social Development (MSD) have begun the process of reviewing a business’ entitlement to the various covid subsidies they had received.
It was well publicised at the time that both the wage subsidy and resurgence support payment scheme were “high trust” models, with emphasis placed on getting the funds out to business’ in need quickly, rather than a proper review of the evidence upfront.
Initially the “audits” of the wage subsidy scheme by the MSD were more of a check box exercise, where they accepted verbal confirmations from business owners rather than conducting a proper review. This subsequently resulted in the Auditor General criticizing the MSD’s approach, leading to a tightening of the review procedures.
Prosecutions began from mid-2021, with recent decisions in early-2022 against individuals who took advantage of the wage subsidy scheme; conviction hearings have yet to be heard at the time of writing. Reviews by the IRD of the resurgence payment scheme, have picked up several business’ that should have paid back the wage subsidy, as they did not qualify for it. One company that was caught out chose to enter an insolvency procedure as they did not have the funds available to meet the repayment.
No doubt both the MSD and IRD investigations into businesses that received the support will be ongoing.
Our discussions with a number of accountants and businesses confirm the general consensus that the year ended 31 March 2021 and 2022 were good years provided you did not operate in the Hospitality, Tourism or Events industry. Given this general vibe it makes sense that further investigations should be undertaken by IRD and MSD. As of 22 February 2022, only $703 million had been repaid of the billions of dollars spent on the Government support schemes. There are likely substantial further recoveries to be made from business’ that were not entitled to them.
With any review, both MSD and IRD are focusing on 2 points. 1. Was the business entitled to apply for the schemes and 2. How were the funds spent upon receipt by the company.
The information they have sought to establish these two points is as set out below:
Six weeks bank statements, cash receipts and invoices prior to the Covid event
The documents requested will look at whether the business was entitled to apply for the scheme. When the schemes were commenced the business needed to have a trading history exceeding three months prior to the covid event, this was then changed to one month to allow new businesses to apply for the scheme and not be unfairly disadvantaged by the Governments actions.
Once it was established the business had traded for the minimum period through receipt of funds and invoicing history, they look to review the “six-week average/typical” revenue for the business in the pre covid event period. They check the amount claimed as the start was accurate and has not been inflated or artificially increased by funds earned outside of the six-week period. This pre covid event revenue figure is where the percentage drop is measured from. It is important that it is accurately measured and not inflated in any way. The review would also check that the funds received were from trading on the business and should be defined as revenue.
Further checks may also be performed on the invoices and customer base of the business, to ensure that the invoices are genuine. If longer than 30-day payment terms are in place with the business or to justify large cash sums that have been received and are outside the normal course of the business’ trading activities. This would include providing the contact and details of your customers.
Purchase invoices/receipts & bank statements
Next up is the look into how the funds received were spent.
If the business claimed the wage subsidy for an employee; did the funds go to the employee? PAYE records are easily used to establish the individual was an employee prior to the covid event. If the IRD’s MYIR records are insufficient, or they were a new hire than additional evidence by way of employment agreement or payment of wages by bank transfer and timesheets for the employee will be required. For owner operators, they will check that the owner has drawn a wage in the past, otherwise the steps undertaken when checking the business had been trading for 1 month above will be sufficient to prove this point.
If the business claimed the resurgence payments, checks will be performed to ensure the funds were not; simply paid to the owner, their related entities, or banked and not used. This will be through providing invoices and bank statements showing the funds were paid out and to whom.
Bank statements and income invoices for the period applied for.
Once it is established that the business was entitled to the funds and that they were spent appropriately, the next check is to look at the percentage drop in revenue experience by the business or if they were a group of companies, that of each who claimed the subsidy, the percentage drop across the group was greater than the required percentage drop to qualify for the scheme. Checks will be made to check that the decrease in revenues was not achieved through the intentions of the business and its directors to defer the revenue to a later period.
While the percentage of the drop is important, they will also look through the figures to review the reason behind it. With the later rounds of subsidies available any drop in revenues had to be the result of covid and the government's restrictions rather than a usual seasonal slowdown or the intention of the business owner to work reduced hours.
The above information IRD or MSD can request, it is comprehensive in what it covers and certainly within their powers under the terms and conditions signed up to when you applied and received the subsidies.