A recent visit by HMRC to one of our clients has highlighted the need for appropriate due diligence around the use of subcontractors in the construction industry, where fraud by criminal gangs is a real problem for HMRC.
The way the fraud works is a Limited Company contractor registers several innocent hardworking subcontractors, and then they secure work with a main contractor. The fraudulent company then applies for Gross status under CIS, collects the payments, deducts the CIS from their subcontractors but does not register the subcontractors with HMRC and does not pay over the deducted tax.
HMRC have a team dedicated to reducing this type of fraud but need the help of contractors to spot and report any peculiarities with their subcontracts.
Your Responsibilities
HMRC state that failure to take reasonable actions to make sure that your supply of labour is legitimate can lead to significant legal, financial and reputational risk for your business. It could even stop your business from operating entirely.
HMRC make a number of recommendations to help minimise this:
- Where possible, contract with subcontractors directly and avoid using gang leaders if you can.
This means you get to meet and know your subcontractors and you are the one deducting the CIS and paying it over directly, not relying on a third party to do this.
- Know your subcontractor
If you use subcontractors which are Limited Companies then meet the directors and ideally, visit their premises so that you can judge if the company is genuine.
One warning sign is changes to Company Directors, as a rogue company is often passed between criminals. It is recommended that you set up Companies House alerts on your subcontractors, which can be done for free on Companies House and will alert you to changes. Any changes can be queried with the subcontractor.
Keep an eye out for subcontractors working for different limited companies as this could indicate a criminal gang moving subcontractors from one company to another to “walk away” from a company that HMRC have caught up with.
- Use the correct Contract
You should have contracts in place for the type of subcontractor you are using, which should include copies of insurance, health and safety etc, but you should also gather information on your subcontractors’ workers.
You should be requesting a list of subcontractors they use when you sign up a subcontractor gangmaster, including seeing their passports and their right to work in the UK.
- Verify your subcontractors regularly
HMRC state that you should verify the subcontractors you regularly use at least every two years, but unofficially this should be no more than 6 months to ensure that you are abreast of any changes.
- Request copies of CIS300
A belt and braces approach recommended, is to periodically request copies of your subcontractors CIS300 to prove that taxes are being reported to HMRC.
Conclusion
Thankfully, our client has all the correct procedures and documentation in place. Realistically, if you verify your subcontractors regularly, have the correct paperwork in place, know your clients and act on any suspicion you have, then you should be ok.
95% of all subcontractors are trying to abide by the law and pay their taxes, but the 5% are the ones that are taking the tax from the country’s coffers, and it’s these that HMRC is keen to stop.
