COVID-19: Preparing for a wage subsidy audit – Would your business be ready?
Tax Alert - August 2020
By Robyn Walker and Blake Hawes
As we’re now into the second half of what has been a rollercoaster of a year, New Zealand continues its long uphill climb of recovering from the COVID-19 outbreak. A climb that, while it may look daunting, may be a lot shorter than many other countries will have to complete.
While businesses will be planning their next steps as the country’s economy rebuilds, the Ministry of Social Development (‘MSD’) have begun the mammoth task of auditing certain applications made under the Wage Subsidy Scheme (‘the Scheme’); an action signalled from very early on in the Scheme. While the swift move into audit phase may seem harsh, the statistics that emerged regarding fraudulent claims on hardship grants after the Canterbury and Kaikoura earthquakes prove that some people will take advantage of ‘high trust’ opportunities.
Given the significant sum spent by the Government and the high level of public interest in the Scheme (evidenced by the regular media articles naming claimants), businesses should be looking to revalidate their eligibility to have claimed under the Scheme (both the original 12 week Wage Subsidy and the current 8 week Wage Subsidy Extension). Where appropriate, businesses should look to repay amounts claimed if there ultimately wasn’t an entitlement to it. This is a process which is especially important for businesses who made a claim on the basis of an anticipated revenue loss under the original Scheme. Now is the time to validate and document that this loss did actually arise as predicted.
When considering your eligibility in light of a possible audit by MSD, we believe there are five key areas:
1. What is your degree of confidence that the business was and remains eligible for the Wage Subsidy?
To assess if your businesses was and has remained eligible, consideration should be given to the parts of the declaration that were not certain at the time your application was made. This is most likely your revenue decrease and the amount you paid your employees.
If your application for the original Scheme was made on a predicted 30% or more revenue decline, active steps should be taken to assess whether this decrease has materialised and whether the decline was due to COVID-19. The evidence of this should be documented in the event you are asked to prove it. As an aside, many COVID-19 concessions (particularly in relation to tax) only apply to businesses that have been "significantly affected by COVID-19," so there are multiple reasons why businesses should be understanding and documenting what the revenue impacts of COVID-19 have been.
When your application was made you would have declared to endeavour at your ‘best efforts’ to pay and retain employees at 80% of their regular income after receiving the subsidy (less than 80% is accepted in circumstances where this was not possible). Payroll data should be assessed to ensure that employees’ pay remained the same, or at 80% of normal, or at a lower amount agreed to by the employee or with a union. This information should also be held on record. It was made clear by the Government that COVID-19 has not changed any employment laws, so it is important to also document how workers’ rights were complied with.
2. What is your degree of confidence that the business was and remains eligible in respect of all employees named on your application?
Larger employers will often see multiple changes to the makeup of their payroll costs and employment numbers every payday, with employees regularly moving in or out of the business or changing their status (for example, going on parental leave). Consideration should be given to all of the named employees in your application and whether they were all eligible for the wage subsidy during the entire 12 week period of the original Scheme and/or 8 week period of the Wage Subsidy Extension. While not an exhaustive list, some of the changing circumstances that are regularly faced by businesses that may impact on their eligibility are:
- The impact of casual or seasonal workers with varying hours;
- Any new starters or (voluntary) leavers during the wage subsidy period;
- Any redundancies during the wage subsidy period;
- Whether any employees received ACC income assistance payments during any part of the 12 week wage subsidy period; and
- Whether any employees received Government assisted parental leave during any part of the 12 week wage subsidy period.
Additionally, New Zealand is no longer in a State of National Emergency. This means that for all claims made since the State of National Emergency was lifted, businesses should now have on record written correspondence from all named employees, confirming they gave consent for you to provide their personal details to MSD as part of making your wage subsidy application.
3. What steps has your business taken to document evidence that supports on-going eligibility for the Wage Subsidy?
To the extent you are comfortable that your business was, and still is, eligible for a claim made on the Scheme it is important to consider taking active steps to clearly document this eligibility. Having a spreadsheet and a couple of emails somewhere on your computer is not enough. The eligibility criteria per the declaration should be considered in a ‘checklist’ like fashion, and a master file should be constructed which includes the evidence that your business satisfied every part of the Scheme’s eligibility criteria. For example, this should include documenting:
- The necessary revenue drop;
- The steps taken to mitigate the impact of COVID-19 on the business;
- What cash reserves the business had at the time of making the claim;
- What discussions were held with bankers, insurers or business advisors;
- What payments were made to employees;
- On what basis did any employees cease employment (whether voluntarily or involuntarily) during the Wage Subsidy period.
Not only will this pro-active action make a potential audit a lot quicker and smoother, it will demonstrate that you have considered the eligibility criteria and that you are confident that your claim on the Scheme is legitimate.
4. What is your degree of confidence that the evidence collected will be sufficient for a Government agency review / audit?
Once you have prepared your eligibility documentation, thought should be given toward the sufficiency of the evidence gathered. If you operate a small business with few employees and your revenue is recognised under ordinary accounting concepts the documentation may be straight forward. The requirements will vary for a large employer with complex structures and revenue recognition methodologies.
If you are chosen for an audit on your claim, the sufficiency of the evidence gathered now will have a noticeable difference on the overall the audit process.
5. Are there any other relevant facts that may influence the appropriateness of having claimed the wage subsidy?
In addition to the four key areas listed above, business may want to consider any other factor that may impact the eligibility of their claim, whether it’s beneficial or not.
A common question we have been asked is around the impact of a business paying dividends after they have made a claim on the Scheme. While many other countries have introduced dividend restrictions on companies who have claimed Government COVID-19 subsidies (some countries banning dividends all together), MSD have remained silent on the issue.
The silence from MSD indicates that there is no set answer to whether a claim on the Scheme is still valid if dividends are paid after a claim is made, or how soon is too soon to pay a dividend. This means that companies will have to self-assess to determine if the dividend declared is appropriate or not in the circumstances. On one end of the scale a small business making a claim on the Scheme and then shortly after paying a dividend of an amount that is material when compared subsidy received is likely to be looked upon unfavourably. Whereas, a company that has declared a dividend based on the full year end 31 March 2020, who does so every year and does not pay the dividend but credits the value to a current account of the owners to be paid at a later date, is less likely to give rise to questions about the eligibility of the company to claim on the Scheme.
When the government opens its books to distribute subsidies on a scale that we have never seen before, an audit process of this nature is inevitable, and something that the tax paying public demands. The steps taken by businesses now to review their eligibility under the Scheme will make the audit process for all parties easier. However, reviewing eligibility should not only be to document evidence ahead of an audit, it should be used by businesses as an opportunity to assess whether they should pay back the assistance received if they are not actually eligible.
New Zealand has been referred to as the team of 5 million who helped stop the outbreak of COVID-19; the Wage Subsidy play in our game plan has cost over $13 billion dollars and now the same team of 5 million will ultimately be the ones who will pay it all back one way or another. A voluntary repayment by those who, on reflection, were not eligible is the sensible next step on our path to economic recovery (as at 24 July 2020, 11,236 claimants have repaid a total of $344.9 million of wage subsidies).
August 2020 Tax Alert contents
- COVID-19: Preparing for a wage subsidy audit – Would your business be ready?