1. Kānuka (Kunzea serotina, Myrtaceae) dryland shrubland communities of the lowland plains of South Island (Te Wai Pounamu) New Zealand (Aoteoroa) contain a ground cover largely consisting of mosses, predominantly Hypnum cupressiforme. There has been no previous study of the role of mosses in this threatened habitat which is currently being restored within a contemporary irrigated and intensively-farmed landscape that may be incompatible with this component of the ecosystem. 2. The aim of the present study was to investigate the influence of moss ground cover on hydrology, nitrogen (N) availability and vascular plant interactions, and in relation to nutrient spillover from adjacent farmland. Experimental work was a combination of glasshouse experiments and field-based studies. 3. Extremes of soil temperature and moisture were found to be mediated by the moss carpet, which also influenced N speciation; available N declined with moss depth. The moss layer decreased the amount of germination and establishment of vascular plants but, in some cases, enhanced their growth. Spillover of mineral nitrogen and phosphate from farmland enhanced invasion of exotic grasses which may have benefited from conditions provided by the moss carpet. 4. Synthesis: We found the moss layer to be crucial to ecosystem functioning in these dry habitats with low nutrient substrate. However, when the moss layer is accompanied by nutrient spillover it has the potential to increase exotic weed encroachment. Our results emphasise the importance of non-vascular plant inclusion in restoration schemes but also highlights the importance of mitigating for nutrient spillover.