Contractors are being encouraged to challenge potentially “unfair” penalties imposed under stricter enforcement of tax rules for the construction industry.
HM Revenue & Customs (HMRC) launched a consultation in 2009 on proposals to tackle what it saw as an abuse of the Construction Industry Scheme (CIS), a system that ensures construction firms and subcontractors pay the correct amount of tax.
This clampdown has led to cases where the taxman has rescinded a contractors’ gross payment status if they have failed to meet strict new compliance obligations.
Gross payment status allows subcontractors to be paid in full without having any deductions taken from their payment. Loss of the status can result in a serious impact on business cashflow, possible breaches of contract with the main contractor, and lost opportunities to tender for future work.
However, Carol Watters of Moore and Smalley Chartered Accountants and Business Advisors, has helped some subcontractors successfully challenge the removal of gross payment status.
Carol Watters, a tax manager at Moore and Smalley, said: “The removal of gross payment status can be potentially ruinous for some subcontractors, especially in these fragile economic conditions and depressed property sector.
“In a number of cases, we have successfully appealed against the HMRC’s decision and had the subcontractor’s gross payment status re-instated, particularly where the subcontractors’ failure to pay tax on time was caused by a third party or some other unforeseen circumstance.
“Because of these scenarios, it has been problematic for HMRC to draw the line and each case is likely to be judged on its own set of circumstances. I would urge subcontractors who have been threatened with the removal of gross payment status to contact a professional advisor, as it may be possible to successfully appeal the decision.”
According to Carol tax inspectors have to follow a strict set of rules that have very little leeway, which has led to some cash-stricken subcontractors having their gross status removed after just one failed payment.
Carol says contractors and subcontractors can minimise the tax risks to themselves in these difficult financial times by working with HMRC to ensure compliance with CIS rules and seeking professional advice when required.