23 Mar 1 April 2017 Change to Withholding Tax for Recruitment and Labour-Hire Contractors
From 1st April 2017, labour-hire firms* will have to deduct withholding tax when they make payments to contractors. This is going to fundamentally change the payment processes for many labour-hire, recruitment and on-hire companies.
If you pay contractors (including through limited liability companies) to work for your clients under a labour-hire arrangement, you’ll need to start deducting withholding tax when you pay these contractors, and include details of the payment on your employer monthly schedule (EMS).
In other words, you’ll need to run your contractors through payroll, not accounts payable.
* A labour-hire arrangement is an arrangement which in whole or part involves the performance of work or services by a person directly for the client of the entity, or directly for a client of another entity. The entity receives payment from the client and pays the worker themselves.
What will recruitment & labour-hire companies have to do differently?
Firstly, your contractors must submit an IR330C Tax Code Declaration Form to you, electing the withholding tax rate to be deducted from their payments. Without this, they’ll need to be taxed at 45%.
You’ll need to ensure that the correct withholding tax is deducted every time you pay your contractors and then hold that money for payment to IRD.
Note that it is the date the contractor is paid that determines the tax period in which the payment must be declared to the IRD. In many situations, this will differ from the invoice date on the invoice supplied by the contractor.
Finally, you’ll need to include details of the withholding tax on your EMS that you file with Inland Revenue, along with all the PAYE details from your internal payroll.
If this is not done, or not done correctly, the recruitment or labour-hire company may incur penalties, fines and use of money interest from IRD.
Bloody hell, where do I start?
If you’re not sure if these changes apply to your business, it’s probably a good idea to seek advice from IRD or a tax advisor. Otherwise, your first priority is ensuring your processes and systems are in place so you’re compliant from April 1st*.
You probably already have systems in place to capture time worked by your contractors so you can efficiently invoice your clients and pay your contractors. If that system is not your payroll system, then you’ll need to consider a complete overhaul of systems to redirect data flows through a payroll system so you don’t have to enter data twice.
* IRD has belatedly realised that this might take larger agencies more than just a few weeks to get sorted and have offered an extension until 1 July 2017 if “you’d need to incur unreasonable costs to have systems in place to enable you to comply with the changes on 1 April”.
Other things to be aware of
Inland Revenue can only accept one set of returns for each company. If you’re using different payroll systems for your contractors and your internal payroll, you’ll have to do manual filing. Don’t do that, it’s a nightmare. Move them to the same system.
You may find that with the additional tax being deducted your total tax payments for the year are now in excess of $500,000. If that is the case you may need to start filing twice monthly with IRD, rather than just on the 20th of the month following.
Some contractors will give you a Special Tax Code Certificate specifying that they do not need to have tax deducted. Note that you still need to report the earnings of these contractors in your IRD returns.
How can FlexiTime help?
It’s easy to manage contractor withholding tax in FlexiTime. You simply enter the contractor’s details, select the WT tax code and enter the appropriate deduction rate. FlexiTime will automatically calculate withholding tax from each pay and include the details on your IRD returns.
But if you want to take things a step further, you can opt for our full middle-office recruitment setup.
Contractors record their hours online, clients approve time via email and FlexiTime uses the approved time to generate both invoices to the clients and buyer-created invoices to pay the contractors. Because everything is in the one system you’ve got your margin reports on hand and there is full traceability, no chance of double charging, no manual reconciliation and no errors.
Our integration with Xero means you can automatically create draft accounts payable and accounts receivable invoices in Xero for payroll transactions and billing invoices.
Want to find out more? Give us a call on 0800 148 880 or sign up for a free trial.
Just don’t want to deal with this sort of stuff?
Fair enough. If you’ve got a small team and really can’t be bothered with all the admin, you should consider outsourcing your WT payroll to The Detail, a partner of ours that specialises in contractor management for the recruitment industry.
Inland Revenue: Budget 2016 Changes