We notice that the IRD will, from time to time, target clients who are still registered for GST and claiming expenses, even though their business has not earned income for a while. This is often well intentioned by the business owner. The business is still registered, there is just no income generation occurring for a period of time.
The IRD is increasingly paying closer attention to these situations, and the consequences can be costly if they are not managed carefully. This increased scrutiny is off the back of increased government funding, provided to support tax collection activities.
A key issue is the difference between a temporary pause or hiatus and a business that has effectively stopped, even if there is a hope it might restart one day. A temporary pause is where business activities have stopped for a short period but there is a clear expectation and plan to recommence in a reasonable amount of time. In contrast, there are situations where business activities have ceased and it is not certain when, or if, the business will start up again. This distinction matters, because ongoing tax claims are usually accepted during a genuine temporary pause, but are far more likely to be challenged where the business is simply in limbo.
We have seen cases where the prolonged period of two years without income being a clear trigger point that the IRD may use, however there is no guarantee that they won’t review or target businesses with less than two years of ceased activity. In those situations, IRD required the business to deregister for GST and repay GST that had previously been claimed while not actively trading. While this can feel like a harsh outcome, it highlights how closely IRD is now looking at whether a business is truly paused or in their eyes has effectively stopped.
The key message is to talk to us early if your business has not earned income for some time. In some cases, it may be safer to pause things properly, such as cancelling GST registration, and then re-register later if the business restarts. A clear temporary pause with a realistic restart plan is treated very differently from a situation where there is no certainty about the future. If you are unsure where your business stands, we are here to help you work through it before it becomes a problem.