This article has been provided by Inland Revenue (IRD).
If you’ve missed a tax payment or two, Inland Revenue will usually let you pay it off over time. If you set up a reasonable payment plan and keep to it, no further penalties will be added to your debt. You can even set this up online in myIR, without needing to talk to anyone at Inland Revenue.
However, you’ll encounter difficulties when a tax bill is ignored for too long and penalties and interest get added. For example, leaving a $10,000 PAYE bill unpaid for a year could see the debt grow to more than $23,000. So what can you do when the debt has become too much to handle?
Here are three case studies from the hospitality sector, each involving tax debts and showing what can make a difference when tax debt gets out of control.
Case study 1: Making the necessary changes
A family-run enterprise with several businesses in the hospitality sector found itself in difficulty after the Director experienced serious health issues, meaning some GST and income tax payments were missed over a period of time, and the debt grew significantly.
Once other family members recognised the severity of the situation, they made changes to the leadership of the business and, through their accountant, began engaging with Inland Revenue. Taking into account the Director’s health circumstances, and the fact that current tax obligations were now being met, Inland Revenue agreed to cancel the penalties that had been applied — on the condition that a realistic plan was put in place to pay off the core debt and interest. The family was ultimately able to pay off the debts of some businesses in full, make a lump sum payment toward another, and set up instalment arrangements for the remainder.
Case study 2: Selling the business
A takeaway store had accumulated a large tax debt. When Inland Revenue made contact, the owner initially planned to pay it back, made some payments, and set up an instalment arrangement — but was ultimately unable to keep to it. Unfortunately liquidation proceedings were the likely next step, however, the Director asked for time to sell the business instead. With evidence of a sale and purchase agreement, a solicitor engaged, active listings, and at least one interested buyer, the liquidation proceedings were put on hold. While the sale didn’t raise enough to cover the full debt, Inland Revenue agreed to write off a significant portion rather than pursue it further, given there was no longer an ongoing risk to the tax base and further recovery was unlikely.
Case study 3: Continuing to trade without a viable plan
This case study has a difficult outcome as the owners clearly cared about their staff and their community, however, it’s a reminder that seeking advice early can make a significant difference to what options are available. A restaurant had accumulated a significant six-figure tax debt, a large portion of which was PAYE. Inland Revenue advised the Directors they should consider closing the business, but the owners were reluctant to let down their staff and the wider community. While they offered to pay the debt off over time, there was no realistic means of doing so within a reasonable timeframe. The business continued to trade for several months, during which the debt increased again. Ultimately the business was liquidated through proceedings by the Inland Revenue and there is a further possibility of debt being recovered from the owners’ personal assets.
The cases above show that outcomes vary widely depending on the circumstances — and crucially, on how early people engage with Inland Revenue. The final case study is a difficult one; and highlights how situations can become significantly harder for everyone over time. If you are concerned about your tax position, Inland Revenue encourage you to make contact with them early. If you are concerned about your tax position, Inland Revenue encourage you to make contact with them early — the more time there is to work through options, the better the outcome is likely to be.
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