The Builder, The Tax Man and the Law: Fraud in the Construction Industry 15 July 2012 7 years ago With the authorities taking a closer look at the financial affairs of the construction industry, we consider how people in this sector become accused of fraud, how they should react if under investigation and what crucial steps they should take to establish their innocence CIVIC leaders, builders and businessmen in general have often pointed to the skies and claimed that if there are cranes on the horizon then things are going well. Scenes of large-scale construction are often taken to be signs of strong economic performance. In good times, we literally build on our success. In tougher times, construction can also be a yardstick for a country’s prosperity. Or lack of it. No building indicates shaky economic performance. And now, in these tough economic times, the construction industry is facing another issue – the tax man. HM Revenue and Customs has decided to turn its attention to the construction industry to stamp out what it believes to be fraud while pulling in some extra coffers for the government. HMRC has previously looked to tackle VAT missing trader (MTIC) fraud in dealings of small size, high volume goods such as mobile phones and computer equipment. It now believes construction is overdue closer examination. According to the taxman, the construction site is an all too common stomping ground for those involved in conspiracy to defraud the Revenue. At Rahman Ravelli we know, from representing many clients in the construction industry, that it is a sector coming under increasing scrutiny. We also know how best to represent clients who find themselves at the centre of such an investigation. Missing Trader Intra-Community (MTIC) frauds involved often complex chains of importers bringing goods into the UK VAT free. MTIC, or “carousel’’ fraud, is basically a scam. Goods are imported into the UK by trader A, who sells to trader B, who sells to trader C and so on; with each seller supplying a VAT invoice. The fi nal purchaser then exports the goods to an EU country and is then permitted to reclaim the VAT element (known as his input VAT) while, in the meantime, trader A has disappeared – the “missing trader’’ who never paid the VAT element of his invoice to HMRC. This is a clear conspiracy to cheat. To combat this, HMRC decided to refuse to repay input VAT to some involved in such a chain – whether they knew they were part of a fraud or not. They knew or should have known that everything was not legally safe, as in cases such as HMRC V Livewire Telecom Ltd; Olympia Technology Ltd. Now this idea that someone should have been aware that something was wrong is being extended to construction. And construction also has its own unique reasons to be attracting the attention of HMRC. The HMRC leaflet “Use of Labour Providers – Advice on Due Diligence’’ makes it clear that those supplying workers to the construction industry must be seen to have made “appropriate’’ checks during their activities. In the same way that those in MTIC chains of dealings were denied VAT repayments, the main contractor can be denied repayment of their input VAT if the sub-contractor does not pay the VAT he should or goes into liquidation or simply goes missing. The HMRC has seen the network of contracting and sub-contracting in the construction industry as an area where tax avoidance can flourish. It warns in “Use of Labour Providers’’ that “HMRC is taking steps to combat these losses by tackling specific schemes to defraud’’. But it is not just VAT fraud that has drawn the tax man’s attention to construction. Its cash in hand payments and the often casual nature of employment in construction have – according to HMRC – made it a breeding ground for avoidance of income tax and National Insurance contributions. This is done either by the contractor telling his employees that he has paid it for them when he has not or by either or both parties simply agreeing never to mention them and hoping the avoidance goes undetected. VAT is an indirect tax but direct tax (tax and National Insurance) has also been a target of the fraudsters. Previous studies have claimed that there could be more than 400,000 workers making illegal use of HMRC’s Construction Industry Scheme (CIS) by working and yet claiming to be unemployed. CIS is a scheme that allows builders and constructors registered under the scheme to pay sub-contractors gross of tax and National Insurance. This scheme – dealing with direct taxation – has been the target of fraudulent activity. Companies, individuals and partnerships working in construction need to be registered with the CIS, which setsarrangements should be made for contractors and sub-contractors. The scam works by companies employing these so-called “unemployed’’ workers and yet not paying HMRC the employer’s National Insurance or income tax contributions. At the same time, these workers pay lower NI contributions and can enter tax returns to claim rebates based on their bogus unemployment. In this way, an employer who takes on a worker and pays him £20,000 a year would avoid paying £2560 in NI contributions in that time. And this can mean keeping costs down on a job. A High Court case last year has far-reaching consequences for the construction industry and any other sector where sub-contracting is the norm. A loft conversion company subcontracted work to a variety of tradesmen that is used on its building projects. When HMRC came looking at its books, the company said that it was a project manger for its work and, therefore, was only liable to account for the VAT on the value of its services – not those of the workers it sub-contracted. HMRC disagreed and said the company was liable for the VAT on all services provided by itself and the tradesmen it subcontracted work to. A Tax Tribunal agreed with HMRC but the High Court rejected this and stated that the company’s contracts with subcontractors could be drafted so as to determine that the “subbies’’ were responsible for their own VAT rather than the company. The matter went back to a second Tax Tribunal hearing, which again found against the company. This ruling reaffirmed HMRC’s claim that a company is responsible for VAT on all work done by its sub-contractors – a decision that clearly has massive implications for the construction industry. HMRC believes tax avoidance in construction is more common than ever and now has greater powers to tackle it. And in depressed economic times, when it is receiving less in revenue, HMRC is being more determined than ever to recoup what it believes belongs to it. But with the right legal advice, anyone facing HMRC investigation has no need to panic. In such circumstances, it is vital to choose the right solicitor. Even the biggest fi rms can suffer if they rely on their in-house company solicitor to handle such matters. An in-house lawyer may be familiar with all aspects of the company but they may not have negotiated with the tax authorities before. Tax investigators are always eager to follow their suspicions of wrongdoing but, if they do discover tax irregularities, they are equally keen to reach agreement on what should be done. Compromise is always possible but any company hoping to achieve this stands the best chance of damage limitation if they are represented by solicitors familiar with dealing with HMRC on a regular basis. Construction may be viewed by HMRC as a fertile ground for corruption and criminality. But it can be argued just as forcefully that any irregularities are down to negligence or simple human error rather than pre-planned criminality. But if building a sound legal defence, it is crucial that you look to an experienced business solicitor to provide those all-important firm foundations. At Rahman Ravelli, we see construction clients whose alleged corruption was really nothing more than sloppy book-keeping, absentmindedness or a case of someone becoming overburdened by the pressures of the job. What then has to be done is ensure that the authorities are made aware of the true situation and begin a dialogue that suits everybody. Rahman Ravelli Solicitors are specialists in fraud, regulatory, business and complex crime cases. The firm is currently instructed on a large scale Construction Industry Fraud (Operation Savate) and other high profi le tax fraud cases.