HARSH new rules on labour payments in the construction sector are threatening to hit businesses with a toughened "tax-on-sight" policy.

That's the warning from Alan McCann, tax director of Bury-based accountants DTE who believes businesses will suffer as a result of Inland Revenue plans to tighten the tax treatment of construction industry labour payments.

The "improved" scheme, to be introduced before 2006, means more sub-contractors will effectively be paid net of the "on account" tax deductions. A sub-contractor could be anyone from a self-employed bricklayer to a sizeable business supplying a major construction company.

Alan explained: "To avoid having tax deducted at source, sub-contractors can now apply to the Inland Revenue for registration which enables them to receive gross payment. However, this will only be granted if the sub-contractor passes three stiff tests relating to business, turnover and compliance."

The "business test" means the sub-contractor must operate in the UK construction and allied markets and carry out most transactions through a bank. The current "turnover test" threshold of £30,000 per individual, partner or shareholder will be kept, while new regulations require evidence of turnover.

Alan McCann believes the Inland Revenue intends to use the third test, "compliance," as part of a policy to "tax-on-sight."

He added: "The compliance test will drastically reduce the number of construction businesses being paid gross. It will ensure that only those which fully comply with numerous tax and social security regulations will be allowed to receive major gross payments."

The proposed regulations mean sub-contractors must meet all their Inland Revenue obligations for 12 months before applying for registration. Where the sub-contractor is a limited company, the compliance test will be extended to cover several Companies House requirements.

Alan continued: "Only time will tell whether the new scheme will achieve what the Inland Revenue wants, but I suspect everyone in the construction sector will become hopelessly entangled in red tape."