Recruitment agencies that supply staff to the construction industry and work with composite services company Gabem will now have to make deductions for tax after a legal ruling. The decision could have a crippling effect on Gabem, which works with dozens of recruitment companies. Some in the industry say it could herald a crackdown on contractors.

Her Majesty's Revenue and Customs (HMRC) has withdrawn Gabem's CIS5 certificate, which allowed it to pay contractors on its books gross, without deducting tax and national insurance. Gabem is to appeal against the decision, but it will not be overturned until September at the earliest. An appeal for an injunction to keep the certificate pending the appeal was thrown out by Lord Justice Moses at the High Court last week.

Gabem's counsel, Giles Goodfellow QC, said agencies and contractors would be less likely to deal with the firm if it lost the certificate. He said the HMRC had undertaken a detailed investigation of Gabem's CIS5 arrangements in 2005. He said this had given the firm "no reasonable grounds" to believe there would be a problem. The judge said Gabem should not have assumed the certificate would be renewed.

Gabem tried to have the case heard in private on the grounds that the matters being discussed were commercially sensitive. The judge cleared the court for a few minutes but then decided to make the hearing public, refusing the application from Gabem's counsel.

Gabem managing director Trudy Gordon said the firm would continue to pay contractors as normal, despite the cashflow difficulties it would face.

Trevor Rees, of Knap Consulting, and head of the Recruitment and Employment Confederation's construction sector group, said: "We (at Knap) have two people who were working through Gabem. After the ruling, we asked them what they want to do and they've decide to go to PAYE (Pay As You Earn). It's up to the candidate." The HMRC would not comment on the case.