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Someone I know has led a business in New Zealand for a few years without paying any taxes whatsoever. He sold the business a few months ago and I'd love to know whether he is obliged to pay the debts he made while not paying the taxes and if it is considered a tax scam.

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    The answer below isn't wrong, but it is really hard to know, in practice, if the person really did owe any taxes (or really did not pay any as claimed), without a wealth of additional details. Nothing would prevent you from tipping tax authorities off about this person's bragging about purported tax evasion.
    – ohwilleke
    Feb 16, 2018 at 22:02
  • I tried to preempt the "what if they actually didn't owe taxes?" with the first paragraph. Of course there could be many reasons they never owed tax and therefore didn't pay it, but then that's not a legal question anyway.
    – user4657
    Feb 17, 2018 at 8:17

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We don't know the circumstances. It could be that his business didn't owe any taxes, or that he did clever things to avoid having to pay taxes (legal tax avoidance), or that he did illegal things to avoid having to pay taxes (illegal tax evasion).

In the UK, it is possible to run a company completely legal without having to pay taxes: You must make no profits to avoid paying corporation tax. You must keep your revenue below £83,000 a year to avoid paying VAT, alternatively only sell things that have 0% VAT tax (I think children's clothing fit that category), You must pay employees less than £11,500 a year each to avoid having to pay income tax on their behalf, and you must pay yourself less than about £8,000 a year to avoid paying tax and national insurance. (The company could pay you dividends to increase the money up to £16,500 tax free, but it can't really pay dividends to yourself without making profits).

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    It's also possible to fall to pay taxes that one owes without there being a scam.
    – phoog
    Feb 17, 2018 at 15:45
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Somewhat late response - I found this while asking a question of my own - and surprisingly I think I have the knowledge to answer in the context of New Zealand.

I can make some observations which may clear things up. Unfortunately you might not like my answer.

  • If the company did not make a profit over the period it traded it does not need to pay income tax. It is also entirely possible - probable even - that it would be able to "get money from the government" in the form of a rebate of GST. Even if it made a profit some years, if it made a loss in previous years this can likely carry forward and offset the profit so no tax is payable on it. He can even deduct some things which one might consider personal expenses so he could still (in a minor way) profit without paying tax.

  • There is (as of writing this) no capital gains tax in New Zealand, so no tax is payable for the money made by selling a business. Yes, what I am saying is you can run a business at break even, then sell it for a fat profit and avoid tax. This is unlikely to change soon, as its driven by the same impetus of not having capital gains tax on housing.

  • If the person sold the company (ie the shares in the business and directorship), he is not liable to pay the debts he incurred unless he personally guaranteed them. The debtors can look to the new owner of the company. This practice is not that common exactly because of the risk to the new owner of taking on undisclosed liabilities.

  • If the person "sold the business" - ie the assets of the business, he did not actually sell the company, and company is still liable. Payment of debts should come from the company prior to the owner taking his profit. If he fails to pay, the director is liable, but in reality the courts don't care that much and getting a judgement would be very hard (you need to "pierce the corporate vale)

  • IIRC if a company goes into liquidation, the secured creditors get paid first, then the IRD, then the other creditors. (This only matters if the debts were more then the assets)

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This presumes the business did not have an exemption from certain taxes or meet criteria allowing them to have a net zero tax liability.

The business is liable for the tax, and as the operator of the business, the person you know is almost sure to have criminal liability for avoiding tax payments. Given that this normally involves falsifying documents, fraud charges are also likely.

They may also be liable to the new owner as a result of misleading them about the financial state of the business i.e. that it would be likely to face a significant tax bill in the future. Exact outcomes depend heavily on the case itself.

This may be mitigated if the new owner was aware of the tax non-payment or had not performed due diligence in checking the information they received about the business (e.g. by having an accountant check the financial statements).

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