CONSTRUCTION companies across Kent could be hit by hefty tax penalties after the Inland Revenue announced it will be clamping down on contractors who engage subcontractors on a long-term basis.

Subcontractors are awarded Construction Industry Scheme (CIS) certificates in order to avoid an 18 per cent deduction from the labour element of payments received from contractors.

However, last month, the Inland Revenue issued letters to contractors who engage CIS4 "labour only" subcontractors, where there are concerns over self-employed status. Similar letters will also be sent to individual CIS4 holders asking them to consider, on the basis of six questions, whether their self-employed status is appropriate.

Kevin Meehan, director of tax for KPMG in Kent said: "The Inland Revenue is asking contractors to take this opportunity to review the status of their subcontractors and ensure self-employment is appropriate as part of the preparation for the new Construction Industry Scheme.

“If a subcontractor has been treated as self-employed but in reality the relationship is more along the lines of an employee, then the liability to PAYE and NIC will fall to the contractor. As a result, the Revenue is likely to seek a retrospective liability covering a six-year period.

"In addition, contractors expecting the Inland Revenue to off-set the 18 per cent deduction made from CIS4 holders against the PAYE liability are in for a nasty shock.

“The Inland Revenue has announced that it intends to withdraw the concession in favour of a potential 63.8 per cent financial ‘hit’ on the deemed employer plus penalties and interest."

New CIS legislation will come into force on April 6, 2006 and will have a significant impact on any construction company which uses CIS4 labour only subcontractors. This new scheme is aimed at forcing contractors to take responsibility for the categorisation of CIS4 subcontractors or face the threat of having their own gross payment status removed.

Mr Meehan added: "This is a significant issue for any construction company and it is important they carry out a thorough review of the status of their subcontractors and look to re-categorise as appropriate. Failure to do so may result in serious financial and commercial consequences."