Tax changes for labour hire companies and recruiters

Still confused about the recent tax changes for labour hire companies and recruiters? Don’t worry, you’re not alone.

On 1 April 2017 the government introduced a series of tax changes for contractors on scheduler payments, and how they contract to labour hire companies and recruiters.

Labour hire companies are now required to process contractors through their payroll system so they can withhold PAYE for the contractors.

This means that they’ll need to transition the contractors over to the payroll system to allow this to take place – and not process through the debtor system.

So if you’re a labour hire business and you pay contractors to do work for your clients under a labour hire arrangement, these payments now come under schedular payment rules.

The first thing you’ll need to do is get a tax rate notification form (IR330C) from all contractors, which will tell you the rate at which you’ll need to deduct tax at.

Include the details of the contractor payments and tax deductions on your employer monthly schedule, just like you would with any other schedular payment.

How it works

Essentially this means that contractors need to be processed like employees of the labour hire company and must be paid through the payroll. The following steps outline how this works:

• The labour hire company invoices Company A for labour hire services provided
• Company A pays the labour hire company
• The labour hire company completes a payroll transaction, paying their contractors using the WT code and making the standard PAYE deduction of 20 percent or another withholding rate chosen by the contractor (subject to a minimum of 10 percent)
• The labour hire company sends their Employer Monthly Schedule (IR348) and Employer Deductions (IR345) to the Inland Revenue for the payments made to the contractor and any other staff that they employ.

Paying contractors

If you hire contractors, whether you’re a labour hire business, a recruiter or a business that hires them directly, you should follow the following steps when paying them:

• Brief your payroll team, as the contractor will need to be processed in the payroll system and included on the employer monthly schedule (EMS).
• Download the new tax rate notification form (IR330C) and give it to your contractors to complete.
• Add the contractor to payroll system and process as required. This will update your EMS as it would for any other person receiving schedular payments
• Ignore additional deductions such as ACC, child support, KiwiSaver or student loan.
• If you employ contractors directly, you must record the agreement in a document.

What happens if I’m a labour hire company that was unable to comply with the changes by 1 April?

If you’re making these payments to a contractor who has a certificate of exemption (COE), from 1 April it must be treated as a zero percent special tax rate certificate until the earlier of:

• The expiry date, or
• 31 March 2018

If you’d have incurred unreasonable costs to comply with these changes by 1 April you can delay the date you start to the earlier of:

• 1 July 2017, or
• The date you can start complying

If you want more information on the changes and what they mean for you, you can check out the further reading from the Inland Revenue Department below.

Tax rate notification form (IR330C)

Understanding schedular payments

Tax rate estimation tool for contractors

Labour hire arrangements