Organised fraud in the construction industry – is your company safe?

A recent government consultation document has summarised two main ways that criminals target the construction industry supply chain to defraud the government and the industry of millions of pounds:

• The first involves fraudsters taking over an existing business with CIS gross payment status, which allows it to be paid gross rather than being taxed at source. Next, they under-declare the company’s VAT liabilities and CIS deductions from its subcontractors. Alongside this they will also artificially lengthen the supply chain to make it difficult to reconcile the CIS declaration to all sub-contractors below it. As soon as HMRC identifies a potential problem, the business will close down or disappear without the debt to HMRC being settled. Frequently the workforce will be moved to a different entity which will carry on the fraud.
• The second entails fraudsters forming a new company fronted by a director with a clean compliance record, which will enable the company to pass a test for gross payment status and register for VAT. The business will be run by others with no input from this director and the fraud carried out in a similar way to the situation described above.

Additionally, these activities will usually result in underpayment of tax and National Insurance, benefit fraud and illegal working practices, including offences under the Modern Day Slavery act.

HMRC has responded by setting up specialist teams, which visit the larger construction companies and undertake regular reviews of the relationships between them, their contractors and sub-contractors. This can provide a valuable service, particularly when companies aren’t aware of frauds being undertaken.

It’s essential that all construction companies using labour in their supply chains should undertake due diligence to identify risks and ensure that systems are in place to mitigate fraud of this kind.

If you run a construction company and would like friendly, professional advice about this issue, get in touch – we’ll be glad to help.