Writing on the wall for composite firms?

Firm's injunction rejected by Court of Appeal - final outcome will have ramifications across rest of industry.

A failed appeal by composite company Gabem Management against HM Revenue & Customs (HMRC) and the outcome of a further hearing could have far-reaching implications for the UK construction industry.

The company has been contesting HMRC's refusal to renew its CIS5 card, which expired at the end of June this year.

It had gone to the Court of Appeal to request an injunction for relief while it seeks to resolve issues concerning its CIS status, arguing that HMRC had given insufficient notice of its intention to withdraw the company's CIS5 status. This had left it with little time in which to update its IT systems and for clients to make necessary changes to payment systems.

However, at the half-day hearing Lord Justice Moses declined to grant any injunction.

Gabem operates as a 'composite company', administering single-person limited companies for more than 11,500 individual workers, most of them in construction. It is now operating with CIS4 status only, so cannot be paid gross. This reduces the tax savings it is able to offer to those using its services, potentially making them less attractive.

Gabem is now awaiting a further hearing, with the special commissioners, due to be held in early October.

The government has stated that it is intending to crack down on composite companies, as it believes they can be exploited as a means of tax avoidance by workers falsely claiming to be self-employed. The Gabem decision is likely to lead to further cases by the Revenue against similar companies.

Liz Bridge, director of taxation at the Construction Confederation, said that while Gabem provided services mainly for electrical contractors, the case would have industry-wide ramifications.

Bridge said that while Gabem had always had a CIS5 card, and thought that it would always remain as CIS5 at renewal, HMRC had said that its history has no basis going forward.

"A lot of people copied the Gabem model, and they will be shaking in their shoes. Even if the Revenue is found to be in the wrong, this will have scared companies providing these services."

Gabem managing director Trudy Gordon, said that the appeal verdict was disappointing. "Gabem will continue to operate normally. The change is unfortunate, but not critical.

"There will be a short-term alteration to our cash flow, but Gabem is a successful business and we can manage this."

[Contract Journal, 26 July 2006, p. 3]