The Inland Revenue Department has a formidable reputation. They have extensive investigative powers which can lead to substantial cost and increased tax risk if they decide to audit your business.
You must comply with the IRD, but at the same time you can manage their process so they only receive relevant material with as little disruption to your day-to-day business.
There are many reasons why the IRD might investigate your business: If you are not paying your GST / PAYE. An anonymous source may tip them off, your business’ name may come up in the course of another investigation, or they may decide you’re involved in a business with serious tax risks. Whatever reason the IRD decides, they don’t have to tell you.
There are companies such as Accountancy Insurance who provide audit insurance to mitigate the risk. Speak with your accountant about this option.
If your business is being audited, the IRD are legally allowed to search your premises without a warrant. In most cases they will let your accountant and directors know beforehand, but they can and do make unannounced visits. You’ll have to turn over all relevant material, unless it’s protected by legal privilege.
If you receive an IRD formal demand, doing nothing really isn’t an option. Inaction will limit your options and virtually guarantees insolvency. You can be held personally liable for failing to pay PAYE.
The IRD can find directors liable for their company’s tax under general insolvency law. The law also says if a company agreement purposefully leaves it unable to pay a foreseeable tax liability, a director can be personally liable.
In the first instance the IRD will try for a settlement. This is your chance to negotiate terms and arrive at a compromise that allows you to stay in business while the IRD claims their tax. If you can reach a repayment agreement, the IRD won’t take the matter further.
If you’re unable to reach a compromise, the IRD will obtain a Court order to establish you’re a debtor and how much you owe. You’ll receive a formal demand before the Court order, followed by the Court application if you don’t settle the demand.
One possibility for meeting the IRD formal demand is voluntary liquidation. This would give you and your shareholders a small element of control over liquidation proceedings. You can choose your own liquidator and remain a company director as you work through the liquidation process.
If you do nothing or you can’t reach a settlement, the IRD can apply for their preferred liquidator or Official Assignee and manage your affairs and liquidate your company. In this instance the Court will appoint the IRD’s liquidator. As company director you have less control over the process and must cooperate with the Court appointed liquidator or Official Assignee at all times.
Deciding between involuntary and voluntary liquidation may not seem like much of a choice. Remember, you can choose to have someone that understands you, your business and your industry, and can protect your interests while satisfying the IRD’s demands. Your liquidator can apply specialist skills to remove some of the sting from this traumatic process.
Given the choice between a partner who will walk you through the process, and a stranger who will take a less-balanced approach, which would you choose?
Statutory and formal IRD demands are outside threats to your business. There are just as many risks that can come from within, so how do you protect your business from those?
If your company is experiencing financial difficulty, download our free guide for NZ Companies to discover your different options.