KPMG warns contractors against flouting new tax rules

North West construction firms are likely to face tax penalties this month caused by failure to follow rules under the new Construction Industry Scheme, according to KPMG.

Tess Williams, tax manager in KPMG's Liverpool office, said a good number of the North West's 19,110 construction businesses face threats to their favourable tax status due to failure to comply with the CIS.

The CIS was devised by HM Revenue and Customs to encourage construction businesses to comply with tax obligations. A new compliance system was backed up by the threat of penalties and loss of the cashflow advantage offered by the right to receive gross payments.

According to HMRC, more than 118,000 penalties already been served on construction businesses across the UK that have failed to meet the monthly return deadlines, resulting in fines totalling £11.8m.

One of HMRC's requirements is that a contractor must submit a monthly return of payments to subcontractors. HMRC started charging financial penalties on late and outstanding monthly tax returns in November, after a six-month grace period followed the scheme's launch last April.

Contractors who fail to submit a monthly return up to 28 days late more than three times will face the more serious penalty of losing their gross payment status, which has grave cashflow implications for those who are also subcontractors.

Williams said: "This is an issue for contractors across the North West right now because while the penalties have been in place for four months, we understand many have consistently failed to meet HMRC's returns requirements. As a result, we expect some local firms to be threatened with the withdrawal of their gross payment status if they are late with this month's return.

"In fact, we have seen one business already lose the right to receive gross payment status as a result of failing to submit a corporation tax self assessment return by the due date, even though no tax was due.

"In an industry operating within tight margins and a challenging cashflow environment, losing gross payment status means facing 20% deductions from all payments for construction work – hitting their cashflow hard."

To regain gross status, the Subcontractor will need to demonstrate 12 months' of satisfactory compliance.

Williams added: "We expect that HMRC will continue to apply the new regulations rigorously, so it is vital that contractors understand and comply with their obligations in order to avoid penalties. Contractors must recognise that even though a late return may initially incur only a £100 fine, the impact of losing gross payment status could have serious consequences for the business."