Author Andrew Darney Director
About author

Andrew is a Director at Moore VBW specialising in business advisory, compliance, and planning, including time in the UK specialising in financial analysis across complex global operations.

Introduction

Inland Revenue (IR) are increasing their audit activity across several industries, including construction. If you run projects or manage subcontractors, you may be facing greater scrutiny.

You may notice increased phone calls and IR presence, with site visits becoming more common. With a highlighted focus on GST and PAYE obligations, it is an important time to review subcontractor arrangements, address risks and maintain precise records.

Why are construction businesses attracting more attention from IR?

This campaign targets industries with inherently complex operating environments, and IR is increasing its compliance activity across sectors where tax errors and debt are more common.

In the first 6 months of the campaign’s inception, in 2024, IR reported opening 3,600 audits and screening more than 3 million returns. This led to $859m of additional tax being found.

With over 81,000 businesses, the construction industry is the 4th largest industry in New Zealand. Despite this, a significant number of businesses have had projects cancelled or put on hold, incurred losses of up to $100,000 or are facing liquidation.

Due to this complex environment, IR are enforcing tax debt and business obligations while also aiming to educate and support businesses understand their positions. If project delays or rising costs are putting pressure on cash flow, now is a good time to review your tax position before small issues become bigger problems.

What tax issues does IR commonly find in construction businesses?

Most tax issues in construction are not caused by deliberate tax avoidance. More often, they arise from the way the industry operates. Progress payments, retention money, subcontractor arrangements, changing workforces and uneven cash flow can all create compliance challenges.

  1. One of the most common problem areas is GST. Construction projects often involve deposits, progress claims, variations and retention payments, making it harder to determine when GST should be recognised and reported. Errors in timing can lead to underpaid tax, penalties and interest.
  2. Contractor arrangements are another area of scrutiny. While subcontractors are common across the industry, businesses need to ensure workers are genuinely operating as independent contractors. If a worker is effectively acting as an employee, there may be obligations for PAYE, KiwiSaver and holiday pay.
  3. Payroll compliance can also become complex when businesses use a mix of permanent staff, casual workers and site-based employees. Incorrect PAYE deductions, holiday pay calculations or poorly documented allowances can create liabilities that accumulate over time.
  4. Strong record keeping remains essential. Construction businesses generate large volumes of invoices, variations, timesheets and subcontractor agreements. Missing or incomplete records can make it difficult to support GST claims, deductions or other tax positions if IR request further information.
  5. Tax debt is often a symptom of wider cash flow challenges. Delayed payments, project overruns and rising costs can make it difficult to meet tax obligations on time. Businesses that regularly review their cash flow and tax position are generally better placed to identify issues early and avoid unnecessary compliance risk.

How can construction businesses reduce their compliance risk?

The most effective way to reduce compliance risk is to identify issues early and maintain accurate records throughout the year. While IR’s increased compliance activity may sound concerning, many common tax issues can be avoided through good processes and regular reviews.

  1. Start by checking the fundamentals. Reconcile GST, PAYE and bank records regularly, and ensure progress payments, deposits and retentions are being treated correctly. Review contractor arrangements to confirm workers are classified appropriately and keep supporting documentation up to date.
  2.  Pay close attention to cash flow. Tax debt often develops when project delays, disputes or rising costs put pressure on working capital. Creating regular cash flow forecasts can help identify potential issues before they affect your ability to meet tax obligations.
  3. Strong record keeping remains one of the best defences against compliance risk. Maintaining accurate invoices, subcontractor agreements, payroll records and project documentation makes it easier to support tax positions and respond if questions arise.
  4. Taking a proactive approach can help reduce the risk of audits, penalties and unexpected tax liabilities. It also provides greater confidence that your business is meeting its obligations while remaining focused on delivering projects.

What should you do next?

  1. Review GST treatment on current and recently completed projects.
  2. Reconcile PAYE, GST and bank records monthly.
  3. Check contractor and employee classifications.
  4. Identify and address any outstanding tax debt early.
  5. Speak with a Moore adviser about a construction tax health check.

An audit can be demanding on your team’s time and focus. Finalising yours before the due date allows you to plan resourcing with confidence, reduce pressure in the final weeks, and keep your business operating with minimal disruption. It also supports a more consistent approach to meeting your compliance obligations.

Our advisers work with you through each stage of the audit, helping you stay prepared, well-informed and in control of the process.

Contact your local Moore expert here.