Understanding IRD Statutory Demands
From leniency to liquidations: how the end of Covid hand-outs and changing economic conditions are levelling the playing field.
It seems strange to call the past couple of Covid-disrupted years ‘good times’. But for many companies – and the New Zealand economy as a whole – being put into a medically-induced coma by the Government has been surprisingly good for business.
As insolvency practitioners, we were expecting to be very busy when Covid first hit our shores, but the predicted economic carnage didn’t materialise. And that’s largely down to the Government’s wage subsidy policy. The aim was to support employees by supporting employers and there’s no doubt it stopped many businesses from shutting up shop instantly.
Certain sectors – chiefly tourism and hospitality – had to be sacrificed for the greater good but it was worth it: as well as a low death rate, New Zealand’s economy recovered more quickly than expected from Covid restrictions and GDP grew by 5% in 2021.
As a result of that growth, it was also surprisingly good economic times for the Government and it had a $5.8 billion bump in the tax take in 2021/2022 (largely due to an increased corporate tax take as a result of bigger profits).
While these short-term ‘sugar-rush’ policies were reasonable at the time given the circumstances, they have created a very real example of a false economy. Put bluntly, the companies that should have died were kept alive and, as a result, liquidations have been at record lows across all sectors in New Zealand. Similar trends played out across most other Western economies.
Anyone of my vintage understands that the good times don’t always last and it feels like the training wheels have been taken off in 2022. Governments around the world have basically said ‘we did our bit. We’ve provided subsidies and loans and vaccines and tests to keep businesses going and people employed and now it’s time to look after yourself’.
Without that support, economic growth has started to dip. Inflation is also on the rise, supply chains are still snarled up, the labour market is very tight and recessionary winds are beginning to blow. As a result, the UK has recently experienced a significant upswing in liquidations as ‘zombie companies’ that survived through Covid have started to fall over and liquidations are also starting to increase in New Zealand.
As part of the Government’s policy, there was also more leniency than usual from the IRD (taking its cues from the public sector, the banks followed suit). The IRD was instructed to take a very hands-off and tolerant approach with its taxpayers and during that time I heard of significant tax debt write-offs that allowed companies to continue operating.
The Government giveth, and The Government taketh away and that leniency appears to be coming to an end. Statutory demands – which are sent to debtors to force action – are also on the rise and feedback from my colleagues in the industry indicates that the commissioner is saying it’s time for the IRD to do what it is mandated to do and collect as much tax as possible for the Crown.
The need to be socially responsible and give companies some extra leeway through Covid is now being trumped by the fiscal responsibility it has to ensure businesses meet their tax obligations. And rightly so: tomorrow’s taxpayers shouldn’t have to meet a tax obligation for yesterday’s subsidised companies.
The IRD also has a social responsibility to stop new creditors from being exposed. So if there was a terminal statement – the equivalent of ‘pay up or you’ll die’ – then it’s unlikely any new creditors will be created.
Despite some media coverage about IRD’s increased action on building and property companies, I don’t think it is necessarily focused on these sectors. It is focused on businesses that are ripping off the Government and it is especially interested if they’re not passing on PAYE, which employers hold on behalf of their employees. As an IRD spokesperson told tax specialist Terry Baucher, “we give high priority to any business that has failed to pay employee deductions when due”.
What happens when a statutory demand is issued?
Being sent a statutory demand is certainly a serious event, but the seriousness of it depends on the size of the claim. We’ve always found the IRD to be very open to talking to the taxpayer and coming up with a solution. I’ve been involved in this industry for 30 years and I’ve never had a situation where they’re not open to discussion. There is a limit to their love, however, and if businesses have a sense of disregard, or are blatantly disinterested in meeting their tax obligations, then they can be pretty firm.
As insolvency experts, we come in when there are no other options left, well after the accountants or business advisors. Maybe a business has received a statutory demand from IRD, the landlord is issuing lockout notices, and someone is coming by to pick up their vehicles. The question we ask is: is there anything inside the company that can be made viable again?
Liquidation is the nuclear option; a process that we use to try to clean up a mess. But voluntary administration – where creditors are told to sit on their hands for 30 days while an appointed administrator examines the business and tries to get things back on track – offers a stay of execution.
When is it time to speak to an insolvency expert?
Many directors can’t bring themselves to hand their company over to someone they don’t know. To them, it’s an admission of failure. But the independent assessment is something that emotionally-attached directors often need and I think it’s inevitable that there will be a surge of companies that won’t be able to deal with their circumstances internally as the economic conditions continue to worsen.
It’s a bit like going to the GP – or, perhaps more accurately, the emergency department: you can’t fix your broken leg or smashed nose yourself, but the experts can. And as long as your heart is pumping and your brain is working, then there is a chance you can recover.
If they don’t recover, that’s okay, because there’s a new company created every eight minutes in New Zealand that can take up the slack and some of the world’s most successful companies – like Airbnb, Netflix and, locally, Xero – were created in recessionary environments.
In business, as in life, there is a duality. Old companies die, and new commercial life springs up to replace it. It’s called creative destruction and it’s what creates market dynamism, entrepreneurism and capitalism. In the Covid years, we’ve had plenty of creativity and a robust economic recovery. But the playing field wasn’t level. Now that it’s flattening out, the destructive half of that equation feels like it’s about to make itself known.