Small builders hit by £180m tax fines

Fines totalling £180m charged for late tax returns under the UK's new Construction Industry Scheme (CIS) are adding to the mountain of problems facing smaller construction firms.

It is feared that firms already hit by credit difficulties with banks in the wake of the credit crunch and a drop in workload could be pushed over the brink of insolvency by the extra financial pressure of the fines.

The new CIS took effect last October, when HM Revenue and Customs (HMRC) began to fine companies for late tax returns at the rate of £100 a month per 50 subcontractors used.

Sarah Thomson, senior tax consultant at Accountax, said her firm has since seen a 50% increase in contractors contacting it for help. She believes that HMRC did not anticipate the number of firms facing fines.

Small businesses on the slightly larger side may be the worst affected by the strict penalties, Thomson believes. “It's easier for smaller businesses run by an individual to scale back and hire themselves out for subcontracting,” she said. “Slightly larger firms employing subcontractors will be left in a payment circle, needing the work, but not able to afford to pay the workers.”

The number of appeals lodged by contractors has shot up, with around 30% being conceded before a tribunal, according to Thomson.

But the appeals process has been criticised in the industry for alleged inconsistency. “Appeals are approved according to how reasonable the excuse is,” Thomson explained, “but what constitutes a reasonable excuse has not been defined; there are only internal guidelines.

“It comes down to the opinions of individual inspectors and what their workload is like - they can't refer every case to the general commissioner, so some are appealed.”

Alterations in payment status have also been a major effect of the new system. Last week, Angela Eagle, exchequer secretary to the Treasury, confirmed in parliament that around 10,000 construction firms had lost their gross payment status for continuing to file late returns since the introduction of the CIS.

Industry commentators said that local authorities usually tend to employ only gross payment firms, triggering fears that contractors could struggle even more to find work in a diminishing market.