Contractors set to lose battle for CIS reform

The battle to reform the Construction Industry Scheme (CIS) seems to have been lost with news that the Inland Revenue (IR) has chosen to ignore contractors' calls for a new vetting process for gross payments.

In a letter to trade associations, obtained by CJ, the IR said that although it had spent months exploring the possibility of replacing the turnover test with an enhanced business test, "ministers have decided that passing the turnover test must remain one of the conditions of exemption from being paid under deduction".

As part of the CIS consultation process, which ended in June last year, contractors had urged IR to allow gross payments if a company is VAT registered and has a clean tax payment history rather than relying on the current turnover bracket of £30,000 for a sole trader and £60,000 for a partnership.

Such a system would have improved the trading advantage for VAT registered firms and provided a disadvantage to VAT unregistered firms who trade with other companies and are currently paid gross.

Justifying its decision the IR added: "Any replacement for the turnover test as a passport to gross payment should broadly maintain the timing of funds received by the Exchequer from the current deduction regime. None of the alternative tests preserved that Exchequer flow."

As a peace offering the IR concluded that although the decision "would be disappointing for the industry" it would not be raising the current turnover threshold level.

However, the announcement has been greeted by disgust from the Construction Confederation (CC), which has threatened to pull out of further consultation meetings with IR.

Liz Bridge, director of taxation at the CC, told CJ: "This is an appalling decision. We do not understand how the government can penalise taxpayers who have 'joined the club' and evidenced their goods by keeping them working under deduction of tax. It makes a mockery of the Revenue's claim to be 'working together' or listening to the industry in these consultations."

A source close to the trade body said: "The CC has invested a lot of time and money on this. If the ministerial position is maintained in the forthcoming draft legislation document we will pull out of further talks and leave the Inland Revenue to consult itself."

The draft document, which is due out shortly, will form part of the new changes set to be introduced into the new Finance Bill in March.