Construction firms hit by £150m tax penalties

Jan 27 2009 by Tom Scotney, Birmingham Post

The legal system is being clogged by claims from building firms caught out by new legislation.

Construction firms are being increasingly hit with charges because of problems with the Construction Industry Scheme – a set of tax laws on how payments are made to subcontractors.

The laws have resulted in penalty charges totalling more than £150 million in less than two years since it was launched, with the majority of firms being hit at least once.

And now the appeal courts are starting to see a surge of cases with construction firms appealing against CIS judgments.

Henry Briggs, a senior partner at the Birmingham office of chartered accountants HW said: “The appeal system has been gummed up with appeals.”

The CIS, introduced in April 2007 to tighten up tax compliance regulation, has resulted in the mountain of penalties since it was introduced.

According to the minutes from a meeting of the Construction Industry Scheme Operational Forum (CISOF), that were published by HM Revenue & Customs, more than three-quarters of contractors have fallen foul of the new CIS legislation and triggered at least one penalty.

Building firms now need to OK all new sub-contractors with HMRC; demonstrate that the employment status of each contractor has been reviewed every month; and provide HMRC with a monthly return detailing every payment statement to each sub contractor.

Failure to comply with the regulations, by missing a monthly return submission or submitting an inaccurate return, enables HMRC to issue contractors with a financial penalty.

Alistair Gibson, the leader of the CIS team at finance firm Ernst & Young, said the figures were a clear indication that businesses needed to make tax compliance a key priority.

He said: “On top of increasingly challenging trading conditions the construction industry has had to get to grips with a complex set of new tax regulations which, for most in the sector, have added to their administrative and financial burden.

“Compliance remains a top priority for HMRC and, with a large number of businesses still incurring penalties by failing to properly comply with the new CIS legislation, it needs to remain a focus for the construction sector.”

He added: “I was surprised by just how much revenue has been raised from CIS penalties. A staggering £90million has been generated so far with an additional £67million still ‘in charge’, or due payment.

“This is a phenomenal burden on an industry that is experiencing significant cash flow problems because of the current economic environment.”

Last week, HW accountants said it had discovered the big tax relief for business scheme announced by chancellor Alistair Darling in last year’s pre-budget report did not apply to companies using the CIS – meaning virtually all construction firms.

If firms delay paying tax, they are at risk of losing their CIS status.

The loophole was also criticised by the West Midlands branch of the Taxpayers’ Alliance.

Campaign agent Fiona McEvoy said: “It is genuinely unfair construction companies, hit harder than most in the crisis, are being excluded from the tax holiday. It would be a disgrace if these technicalities end up costing jobs.”

Mr Gibson added: “Contractors need to ensure that they focus their employees’ attention on the need for excellent compliance.”