Construction firms on alert for bogus workers
05/03/2007

Sweeping changes to the tax system for self-employed construction workers could herald widespread identity fraud.

Specialist advisers are warning construction companies to beware of bogus workers using other people's identities to swindle the tax man when the new construction industry scheme (CIS) comes into effect from April 2007.

HM Revenue & Customs (HMRC) is revamping the scheme with a fresh online system that will affect any contractor or subcontractor using a self-employed workforce.

The new regime is designed to introduce stricter checks to ensure workers are genuinely self-employed. However, Kevin O'Brien, a North West based partner at UK top-30 accountancy and advisory firm DTE, is concerned that the new scheme could lead to impostors passing themselves off as someone else.

"The onus is very much on the contractor to have procedures in place to prevent these fraudulent practices. Internal compliance checks must be designed to identify 'stolen' identities," says O'Brien. "These internal procedures will be inspected on a visit from HMRC and businesses should make any necessary changes before it is too late because there are stiff penalties for non-compliance."

Another major area of concern is whether 'labour only' subcontractors are, in fact, 'disguised' employees and the exact nature of the relationship must be set out in a legally watertight contract.

"To get this wrong could be very costly, not only from the additional tax and NIC, penalties and interest, but also due to these 'new' employees becoming entitled to holiday pay, sick pay, and pension rights," explains O'Brien.

"Even a signed contract confirming self-employed status may not be enough. If someone has been working on a regular labour only basis, and his work is controlled by the site manager, the company pays for his mobile phone and he does not work for anyone else, then he is likely to be classed as an employee - no matter what his contract says."

On the other hand, contractors must be careful not to panic and reclassify subcontractors as employees as a precaution. HMRC's policy is to ask for tax arrears in reclassification cases, which can involve going back a number of years and prove extremely costly.

"Now is an ideal time to review all existing subcontractor arrangements as a preventative measure," adds O'Brien. "If businesses do not get their house in order they are heading for problems when they have a compliance visit from the tax man."

[back]