The "PAYE by intermediaries" rules

Sections NBB 2(1)(c), 2(4)(b), 4(1), 4(1B), 4(2), 4(3), 4(4)(c), 4(4)(d), 5(1), 5(1B), 5(2B), 6(2) and OB 1 of the Income Tax Act 1994 and the Income Tax Act 2004

Sections 120OB(1), 141JB(1), 167(2B), 168(4), 169(1B) of the Tax Administration Act 1994

Introduction

A number of amendments have been made to the “PAYE by intermediaries” rules to further improve theiroperability. The rules allow accredited intermediaries to largely assume an employer’s obligations under the PAYE rules — to calculate PAYE, pay it to Inland Revenue and file PAYE returns. The amendments to the rules:

• allow PAYE intermediaries to make payments of net salary and wages directly to employees (from an employer’s account) providedthe associated PAYE is simultaneously transferred, or is transferred before the payment to employees is made, into an intermediary’s trust account;
• clarify the accreditation requirements for PAYE intermediaries; and
• require PAYE intermediaries to represent at least ten employers.

Background

From 1 April 2004, the new “PAYE by intermediaries” rules allow accredited intermediaries to largely assume an employer’s obligations under the PAYE rules (calculating PAYE, paying it and filing returns). Under the rules, employers’ obligations are limited to paying their employees’ gross salary and wages to the PAYE intermediary and providing basic payroll information.

An amendment has been made to the rules to provide greater flexibility to PAYE intermediaries in how they make payments to employees. Before this change, the “PAYE by intermediaries” rules required employers to deposit the gross salary or wages of employees into a trust account operated by the intermediary. The intermediary was then responsible for disbursing the deposited funds — net pay to employees and PAYE to Inland Revenue. Concerns were raised that this model could result in a number of unnecessary risks and transactions costs being incurred by prospective intermediaries.

To deal with those concerns, the rules have been changed to allow PAYE intermediaries to make payments of net salary and wages directly into employees’ bank accounts (from an employer’s account) provided the associated PAYE is simultaneously transferred, or is transferred before the payment to employees is made, into an intermediary’s trust account. Employers and PAYE intermediaries will, however, still have the option of using the trust account for gross salary and wages, if so desired.

Finally, amendments reduce the risk of the “PAYE by intermediaries” rules being abused by entities registering as intermediaries who do not intend to represent any employers, by requiring PAYE intermediaries to act on behalf of a minimum of ten employers.

Key features

Sections NBB 2(1)(c) and 2(4)(b) of the Income Tax Act 1994 and 2004 have been amended to clarify that the accreditation requirements in those sections apply to a “director, secretary or statutory officer” when the applicant is a body corporate and, in the case of an unincorporated body, to the members of the unincorporated body.

Section NBB 4(1) of the 1994 and 2004 Acts has been replaced and new section NBB 5(1B) added to give greater flexibility to PAYE intermediaries in how they can make payments to employees. If the gross pay of employees is not transacted through a PAYE intermediary’s trust account, replacement section NBB 4(1)(a) requires employers to make available sufficient funds to a PAYE intermediary to cover both employees’ net salary and wages and the PAYE. New section NBB 5(1B) then requires a PAYE intermediary, when making payments of net salary and wages directly to employees, to transfer the associated PAYE into the trust account simultaneously (or transfer the PAYE before the payment to employees is made).

As a result of the changes to section NBB 4(1), a number of consequential amendments have been made, including the addition of a new section NBB 4(1B), changes to sections NBB 4(2), NBB 4(3), NBB 4(4)(c) and (d), NBB 5(1), NBB 5(2B) and NBB 6(2) and changes to 65 Inland Revenue Department Tax Information Bulletin: Vol 17, No 1 (February 2005) sections 120OB(1), 141JB(1), 167(2B), 168(4) and 169(1B) of the Tax Administration Act 1994.

The definition of “PAYE intermediary” in section OB 1 has been amended to require PAYE intermediaries to represent at least ten employers.

Application date

The amendments are effective from the application date of the “PAYE by intermediaries rules” — pay periods beginning on and after 1 April 2004.