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Do you use contractors to provide services to your customers?

May 1, 2017

New withholding tax rules apply from 1 April 2017 which can have an impact on the withholding obligations for businesses. Most of you will be aware and familiar with the requirement to withhold tax from certain subcontractors. And you will probably be dealing with subcontractors who use a company for the work they do for you. The new rules extend the withholding tax regime to cover subcontractors who use a company if the arrangement if for labour-hire.

When do the new labour-hire rules apply from, and at what rates?

From 1 April 2017, labour-hire firms must withhold tax from payments to their contractors, including payments to their contractors’ companies.

The default rate of withholding tax is generally 20% for this new category of withholding. However, contractors may elect any rate above 10% and they may apply to the Inland Revenue for a lower rate.

Who do the new labour-hire rules apply to?

Your business will be one of labour-hire:

  • if you arrange for ‘others’ to perform services (brains and/or brawn related) directly for your clients; and
  • you are paid for supplying the ‘others’ – as opposed to being paid for what others do for your client; and
  • this is one of your main activities.

Does sub-contracting make your business labour-hire?

Subcontracting does not, in itself, make your business a labour-hire firm.

If the client has a house to paint then they can employ and pay a contractor to do so. This is not a labour-hire situation because there is no arranging involved.

If the contractor sub-contracts a third party then this is still not a labour-hire situation because the contractor has contracted to supply an outcome, being a painted house.

Does contracting to supply labour make you a labour-hire firm?

Arranging the supply of labour is likely to be a labour-hire arrangement and therefore may be subject to the new withholding rules.

If the client has a house to paint they might approach a firm to find some painters. In this case, the firm meets its obligation by supplying people with painting skills and the firm is a labour-hire firm (if that activity is one of that firm’s main activities).

Penalties

As with any tax obligation, if you fail to meet the obligation there will be penalties.

Examples

Examples where the new rules apply could be businesses providing legal services, wedding planning, training, construction, and modelling agencies. Essentially any service-related business could be a labour-hire firm, depending on the arrangements between the business, the client and the contractor.

These are just examples, for more information please contact us and talk to your accountant.


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