Tax Deducted from payments to Contractors
We previously advised that contractors can select any rate of withholding tax with a minimum of 10% when the requirement for deduction comes in on 1 April 2017. More detail about this is now available and reveals that the deductions are more comprehensive than anticipated from the Budget announcements.
Summarily, if you invoice an IT services, recruitment or other labour hire company for your contract services, then the company will be required to deduct withholding tax from all payments to you from 1 April 2017. This change now applies to those contracting through companies.
Sole traders, those who contract in their own name, should complete an IR330C form. You can elect your own rate using this form with a minimum rate of 10%. With the top tax rate being 33% there is no cause to elect a rate higher than that. A good indicator is the rate of tax for 2016 or 2017, assuming you contracted during that time.
This tool may also be useful.
Whatever rate you elect it won’t affect the final amount of income tax payable calculated at the end of the tax year. If your rate was too high you may receive a refund; too low and you’ll have tax to pay and provisional tax as well.
If it appropriate for you to elect a rate lower than 10%, you will have to complete an aptly numbered IR23BS form. This would apply if you have tax losses or other credits from income tax. If you don’t complete an IR330C your payer has to deduct withholding tax at the no-notification rate of 45 cents on the dollar.
If you contract through a company, it is more complicated. The withholding tax is deducted from the company and the deduction cannot be passed to the you. Effectively the income of the company allocated to you will not have these tax credits, so you’ll still have to pay PAYE or provisional tax during the year and wait until the end of the year for the company to receive a refund. As this doesn’t make sense the company should have completed the IR23BS special tax code application and elect a withholding rate of 0%. Once the company has received the special tax rate certificate it should also then complete the IR330C. The same no declaration rate of 45% applies to companies if no form is submitted.
These changes do not affect contracts made by a company directly, but only to contracts made through a labour hire agreement. This may influence how you structure your arrangements. As with sole traders the withholding tax amounts don’t alter the final taxation to be paid. They merely influence the timing of payment of income taxation.
Please contact us if you would like to discuss these changes and how they may affect you.