Firms suffer after CIS gross tax status cuts

Thousands of contractors are facing financial ruin after losing their right to be paid gross of tax under the CIS tax scheme.

Officials at HM Revenue & Customs (HMRC ) have been taking a tough line with firms that submit tax returns late.

Hundreds of companies each week are having their gross status revoked. And contractors forced to be paid net of tax are suffering cashflow problems which are being exacerbated during the ongoing credit crunch.

Tax experts are now gathering evidence of how losing gross tax status affects contractors in a bid to persuade HMRC and the Treasury to soften their approach to the issue.

Institute of Chartered Accountants CIS tax representative Howard Royse said: "Thousands of firms have lost their gross status and our belief is that one in three firms is now falling foul of the system.

"We have met with the Treasury and they want evidence from us of what losing gross payment status does to a contractor. They have quoted cases where firms have lost gross status and still carried on trading with no problems.

"We want to show them the other side of the coin and the problems contractors in that situation face."

Companies stripped of gross payment status see their cashflow suffer and struggle to win construction work.

Royse said: "As well as the cashflow problem, firms also lose out when it comes to local authority work because they often won't consider a contractor that has been ruled against like this by HMRC for making late returns."

An HMRC spokesman said: "Currently we have no evidence that loss of gross payment status is causing businesses to close."

• Tell the Treasury how losing gross payment affects you. Email comments to Howard Royse.

CIS in numbers

• 107,000 contractors had gross payment status when CIS started in April 2007
• 30,000 firms have had their status reviewed
• 12,000 have had gross status revoked
• 3,000 have successfully appealed against the decision
• Source: Institute of Chartered Accountants