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On the brink of what seems likely to be the deepest, longest recession any of us have ever experienced, HM Revenue and Customs is rearranging the deck chairs on the Titanic.

By continuing their long-term drive against construction鈥檚 smaller businesses as though nothing untoward were happening, they are threatening the very sector that can respond most quickly to an economic downturn and then lead a recovery.

Since the beginning of the year, HMRC has been reviewing many thousands of construction companies registered for gross payment status under the Construction Industry Scheme (CIS). Gross payment status means that they are registered to receive full payment from listed clients without deduction of income tax. If they lose that right, it is very difficult for them to work in the CIS-controlled sector 鈥� that is, most of the legitimate construction industry.

Small businesses are by far the most efficient and economic service providers.

CIS registration demonstrates their intention to pay tax, as opposed to their competitors in the cowboy cash economy, which is virtually beyond regulation. By definition, this cash sector is thriving because cowboys and their customers are colluding to avoid paying any tax at all.

If small companies lose the right to be paid gross, it is very difficult for them to work in the CIS-controlled sector

Thousands of small companies have been forced down to tax-deducted status or have lost their registration altogether because they, their owners, or one of their directors has been late paying income tax. This cannot be ignored, but in an equitable world, penalties should be proportionate to crimes.

HMRC is also using CIS registration to deter small companies from entering the market by delaying and then refusing applications for gross CIS registration. I know from personal experience. Following a management restructure, it was decided to revive a dormant company and apply for gross payment status.

What should have been routine application for gross CIS registration was lodged with HMRC on 7 December 2007. More than four months later, I learned that we had not received confirmation, nor could HMRC give us a reason. So, on 30 April, I sent the details to my constituency MP requesting that he ask HMRC for an explanation on our behalf. This quickly provoked the response that our application had been refused and we hadn鈥檛 been informed for five months because of a 鈥渟ystems failure鈥�, which we now understand affected a many other applications.

To cut a saga short, the application was refused because one of our directors was (for a perfectly genuine reason) two or three weeks late paying a 拢206 tax bill in February. Our specialist adviser said: 鈥淭his is standard practice; write them a grovelling apology.鈥� This we did, and our registration was granted on 19 June 2008.

I wonder what happened to the thousands of other applicants who did not have such a helpful and influential MP to speak for them?

if it is serious about mitigating the effects of the downturn, the government needs to get real about deregulation. please don鈥檛 set up another commission

It is not the function of HMRC to restrict entry to the construction industry, particularly when it鈥檚 costing the taxpayer between 拢100m and 拢140m a year (HMRC鈥檚 original estimate was 拢50m a year) probably for little gain. I suspect that the cost to the industry of this totally unnecessary regulation is many times more.

The traditional concept of 鈥減ublic service鈥� is virtually extinct, replaced by the 鈥減ublic policing鈥� of penalty enforcement. In April this year it was widely reported that a man in Cumbria was given a criminal conviction after he refused to pay a 拢110 on-the-spot fine for allowing his wheelie bin lid to be open by four inches. The list of bizarre penalties like this is growing daily.

To delay granting a reputable company gross CIS status because it accidentally paid a small tax bill late is, in my opinion, in the same malicious nonsense class as criminalising a person for overfilling his wheelie bin. If it is really serious about mitigating the effects of the downturn on business, the government needs to get real about deregulation. Please don鈥檛 set up yet another commission to obfuscate the subject, but nullify or repeal at least 25% of current regulations. Top of that list must be the CIS.

It might just plug the hole in the Titanic鈥檚 hull. It will certainly show smaller businesses that there is someone in government who isn鈥檛 trying to penalise, disrupt and smother them in red tape, but actually values their services.