Anti-fraud: The taxman cometh

The recession has increased the pressure on construction firms to get the job done at the right price. Although it can be comforting for contractors to know there are numerous providers of flexible labour to call on at these times, the growth of the labour provision market has caused particular concern for HM Revenue and Customs.

The Revenue has identified increasing problems with fraud and unpaid taxes through the use of labour providers. Construction has been highlighted as a problem area but there are unscrupulous gangmasters in the agricultural and food processing sectors too.

Allegations of fraud from the taxman are not new. What is new is the Revenue’s tough approach,which can be damaging, if not fatal, to any business that is shown to have dealt with bogus or fraudulent activities.

The Revenue is taking the issue so seriously that it has set up labour provider units as part of its special investigations section.

The main tax compliance problems in construction are bogus supply chains and serial phoenix companies (that is, “new” businesses starting from a failed business where the operation is fundamentally the same).

In today’s industry, both parties are likely to be within the Construction Industry Scheme (CIS) and both will hold “gross status”.

Remember that to maintain your gross status, your own tax compliance must be kept 100% up to date. Being connected to bogus or fraudulent payments within the scheme would put this status in serious doubt. And in my experience, the loss of gross status can be catastrophic for a business both in terms of cash flow and reputation.

Since April 2007, legitimate operation within the CIS depends on the contractor using the verification process: a contractor must obtain identity details from a subcontractor and then contact the Revenue to verify those details before making any payment.

Although this administration is an added expense, it is a necessary cost that can protect a contractor against bogus or fraudulent labour providers and ensure compliance with the CIS.

The loss of gross status can be catastrophic for a business both in terms of cash flow and reputation

The sale or misuse of identity details can occur in the same way that old CIS cards were misused. However, the more information you obtain (within reason), the better chance you have of demonstrating that you acted reasonably at the time of the engagement, should the Revenue ever question your actions.

There are no prescribed checks that can be given, as each contractor and subcontractor will be different. However, contractors may wish to consider the following points when engaging their next labour provider or subcontractor:

• Obtain a name, trading address and contact numbers for the business
• Verify the National Insurance number of director/owner, the tax reference number, the VAT registration number and confirm that the business is set up for PAYE/CIS payments
• Obtain copies of passports, driving licences and recent utility bills in relation to the firm’s directors/owners
• Do they use subcontractors themselves? What checks do they make on their workers?
• How did they approach you? Was it a recommendation?
• Is it a replacement business: that is, is it a new business supplying you with the same workers that you were using before?
• Have you been requested to make payments to a third party? If so, do you know why?

By no means should this be taken as a definitive list. Contractors should be flexible, but most of all they need to ensure they are protected.

Falling foul of this process could mean a detailed tax investigation for you, the loss of your own CIS gross status and the loss of your right to recover the VAT incurred on transactions with the labour provider.

The construction market is tough enough at the moment without the added woes of getting caught up in fraud. Taking a reasonable view and applying a commonsense approach will enable contractors to eliminate what could be a major headache - and stay on the right side of the Revenue.

Andrew Walker is a director of BTG Tax, part of Begbies Traynor Group