'Transparency is the key' - warning over undisclosed tax debts

Businesses and consumers are being warned to beware when lending or advancing payments to businesses, with many thousands of businesses carrying undisclosed tax debts.

Inland Revenue (IRD) says it had abandoned its softer approach to collecting overdue tax from businesses during the Covid-19 pandemic and planned to take stronger action against debtors, including enforcementand insolvency proceedings.

Keith McLaughlin, managing director at credit aganecy Centrix, says there is no way to know how much tax debt a business was carrying as Inland Revenue did not disclose that information to credit agencies.

He said he was unaware of how to obtain that information.

"If you're going to get a builder to come and do some alterations to your house, you want to know that builder has the ability and the financial means to finish the job," he said.

"But if there's a pending debt to the IRD that you're not aware of, then you could be caught out on that.

"So I absolutely believe that transparency is the key and the market. Needs to be fully informed of all the risk that a business may have."

Inland Revenue said the construction sector accounted for most of the businesses in default, with about 40,000 construction businesses with outstanding debt, overdue tax returns or both.

IRD's top 10 list of sectors with tax arrears in order of highest to lowest:

• Construction
• Renting, hiring and real estate services
• Professional, scientific and technical services
• Agriculture, forestry and fishing
• Accommodation and food services
• Wholesale trade
• Financial and insurance services
• Transport, postal and warehousing
• Administration and support Services
• Other services (personal, private households employing, repair and maintenance)

The tax department said it would pay a visit to businesses who failed to respond to more than one reminder and warning notices, and would take stronger action against businesses that carry on, ignoring their obligations.

It was asking tax agents and accountants to help get business customers with significant tax debt to pay up.

Accountants and Tax Agents Institute chair Richard Abel said members were already working with customers to help them meet their tax obligations.

He hoped Inland Revenue would not come down too hard on businesses working to pay their debts.

"Hopefully we can work with them in order to come up with a plan that's going to benefit Inland Revenue as well as our clients," Abel said.

"It is definitely a struggle for many businesses at the moment."

He said tax agents were regularly provided with information about their customers' tax debts, though that information was confidential.

McLaughlin said IRD should also be sharing that information with credit agencies.

"The biggest problem that we see is as you have a lot of small businesses out there extending credit at the moment, and even if they do a credit check through a bureau such as Centrix, they don't get to see the tax debt by and large, and therefore they could enter into an agreement or a contract, expecting the accounts to be paid, and then all of a sudden the tax department moves to recover their debt and the business is then wound-up.

"So it does expose a lot of small and medium sized businesses to a very high degree of risk that they cannot at this stage really moderate by doing a credit report."

Abel said the best thing people should do before extending credit or making an advance payment was to put in place some protections, such as a personal guarantee.

"There's a range of things that that taxpayers can do to to protect themselves, and I guess these days, it really pays to be vigilant," Abel said.