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Does the tax punishment fit the crime?

The Tax Treatment Qualification Test threatens to damage companies unfairly, believes Alan Nolan

Having experienced my first Grand National at Aintree last month, I was left to reflect that the winner’s name, Comply or Die, was also a racing certainty for the construction industry.

Currently, boardroom talk is all about compliance, whether it is the recent OFT investigation, tax, immigration or the employment status of subcontractors.

Many group finance directors are responding to this, moving corporate governance up the business agenda. They are tightening up policies and procedures around the Construction Industry Scheme, payment of expenses, the use of subcontractors and the operation of the payroll systems.

The first anniversary of the new CIS, effective from 6 April 2007, has largely gone unnoticed by the majority of the construction industry. But for many of those businesses unlucky enough to be caught up in the Revenue’s new Tax Treatment Qualification Test, the outlook is bleak.

Under the previous scheme, compliance failures were only examined at the end of a three-year period when the Gross Payment Certificate came up for renewal. Any failures considered to be “minor or technical” in nature were overlooked.

But the new regime allows HMRC to examine a 12-month compliance history for any construction business whenever it feels justified to do so. Failures are now considered by HMRC under the banner of -“reasonable excuse”.

Actually, that’s not technically correct; it’s the HMRC computer that makes the -initial decision to withdraw gross -payment status, issuing cancellation notices with scant regard for current trading conditions, administrative overload or, -simply, without just cause.

The appeal procedure is through the General or Special Commissioners, costing the construction industry and the Exchequer millions of pounds in legal fees to defend them.

Losing the right to receive gross payment status will have a serious impact for the subcontractor and contractor alike. For the subcontractor, the damage to its reputation through being “convicted” by a Government department as being “non-compliant” will be significant.

Direct cost of materials

We are already seeing the reluctance of banks to refinance construction businesses in distress. A tax “conviction”, which could be a mere administrative failure, may be the final straw.

For the contractor, the administration of the tax deduction and the need to establish the direct cost of materials supplied by the subcontractor will increase the financial risk and administrative headache for a hard-pressed finance department already swamped by regulation.

HMRC should urgently reconsider whether the punishment fits the crime. It should include within its definition of reasonable excuse the effects of the financial crisis and the subsequent pressure on jobs.

The delivery of key projects will be compromised if construction businesses fail as a c-onsequence of losing the right to receive gross payments.

Alan Nolan is director of people services at accountant KPMG