Tax Updates – 17th August

Horticultural sector non-compliance on IR’s radar

Inland Revenue has issued Revenue Alert RA 26/02, signalling a significant escalation in its compliance focus on the horticultural sector. The Alert identifies a cluster of practices the Commissioner considers pose a real risk to the integrity of the tax system, and confirms that growers, contractors and subcontractors across the sector will face increased scrutiny. Therefore, if you have clients operating in, or supplying labour to the horticultural sector, the following is worth noting for your next discussion with them.

What has caught Inland Revenue’s attention

The Commissioner has identified three recurring practices of concern:

• Payers of schedular payments failing to correctly deduct withholding tax from cultivation contract work;
• Complex, and in some cases artificial, contracting arrangements used to obscure who performed the work; and
• Workers being paid in cash, outside the visibility of PAYE and other tax and employment systems.

Inland Revenue is particularly concerned about arrangements involving false invoicing, where an entity issues invoices (or taxable supply information) for labour it did not supply. These entities often have little or no genuine business activity. The effect is that the entity whose workers did the work avoids its GST, PAYE, and income tax obligations, while the paying entity may improperly claim income tax and GST input deductions based on the false invoices. Inland Revenue notes these arrangements are frequently accompanied by cash wages, which also raise money laundering and worker exploitation concerns.

A reminder on the schedular payment rules

The Alert restates the core withholding position: payments to contractors for “cultivation contract work” — broadly, work or services that are for, or substantially for, the supply of labour on land used or intended for the cultivation of fruit, orchards, vegetables or vineyards — are schedular payments under section RD 8(1)(a) and schedule 4, part C, clause 1(b) of the Income Tax Act 2007. Withholding is required from any payer, not only orchard or growing facility owners, and applies even where the contractor is a company, given the specific horticultural/viticultural company provisions in sections RD 8(1)(b)(iii) and YA 1.

The obligation to withhold sits with the payer unless the contractor has provided a valid, current certificate of exemption or a 0% tailored tax rate certificate. Where a contractor has not provided the IR330C, the payer must still withhold — at the standard 15% rate for cultivation contract work if no rate is notified, rising to 45% if the contractor has not provided their name and IRD number. Importantly, amounts withheld under the schedular payment rules are not a final tax; contractors remain separately responsible for their own GST and PAYE obligations.

Penalties and enforcement

The consequences for non-compliance are significant. A payer who fails to withhold when required may face criminal liability under the Tax Administration Act 1994. Taxpayers who knowingly participate in these arrangements to evade tax may be prosecuted for tax evasion, carrying a maximum fine of $50,000, up to five years’ imprisonment, or both, in addition to shortfall penalties of 150% of the tax shortfall for evasion or an equivalent act.

Inland Revenue has also flagged that where its investigations uncover evidence of other offending, it may share information with other agencies — including the Police, Customs and the Serious Fraud Office for serious crime, AML/CFT supervisors, and the Labour Inspectorate for breaches of employment and health and safety standards.

Inland Revenue’s stated areas of focus

Going forward, Inland Revenue says it will:

• Consider information-sharing with other regulators where other offending comes to light.
• Increase scrutiny of new GST registration applications from horticultural sector entities, particularly where there is doubt about whether a genuine taxable activity is being carried on;
• Continue to investigate withholding non-compliance by growers and other payers, with particular attention to the use (and misuse) of certificates of exemption and tailored tax rates;
• Increase debt collection action in the sector; and

What this means for clients

This Revenue Alert is a clear signal that Inland Revenue views horticultural sector labour supply chains as a high-risk area, and that increased audit activity should be expected. Growers, orchard management companies, and labour contractors should:

• Confirm that IR330C tax rate notifications are held for every contractor, and that withholding is correctly applied where no valid notification, exemption certificate or 0% tailored rate certificate is on file;
• Retain the required records (a minimum of seven years) evidencing the tax treatment applied to schedular payments;
• Review contracting chains for red flags such as invoicing entities with no discernible business presence, or a mismatch between the entity invoiced and the entity supplying labour; and
• Consider a voluntary disclosure where historical exposure is identified, noting Inland Revenue’s stated preference that taxpayers engage proactively rather than wait to be investigated.