Warning: Payroll companies disguised as ‘commercial contractors’

To complement an ever-growing list of obligations and legislation around labour supply, HMRC has set up a department called the Fraud Investigation Service (FIS) which is targeting construction firms and their supply chains.

The Government is concerned that construction is open to exploitation of labour through agencies, intermediaries and gangmasters. HMRC believes that construction has a huge problem with VAT payroll tax fraud.

All of these concerns are rolled into the updated ‘Due Diligence of Labour Suppliers’ guidelines published on the .gov website. The guidelines are monitored and enforced by FIS officials who visit construction firms and look at each and every supplier which may have a labour element to the services they provide.

The basics are that FIS would expect to see contracts with those suppliers, VAT records, identity checks, compliance with modern day slavery best practice, national minimum wage and employment status.

We are aware of a number of cases where FIS is pursuing firms for VAT their labour suppliers have failed to pay over to HMRC. Even though the enquiries do not relate to labour supplied by Hudson, we have helped our clients navigate the complex and time-consuming investigations that FIS carries out. 

Would You Pass the Test?

We are aware of an ever-growing group of payroll companies who call themselves ‘Commercial Contractors’. They avoid agency legislation by pretending to be contractors providing construction services rather than being open about the fact that they are payroll intermediaries. These firms typically use an ‘off-the-shelf’ contract designed to throw HMRC off the scent by saying they provide construction services.

Many of these companies have glossy websites which make overblown statements about their compliance capabilities and they carry letters of recommendation provided by the people who sold them the use of the generic contracts. They divert from the real business of employment status by selling insurances and saying they can help firms dodge the CITB levy. Most offer to charge the workers so they will tell you they will cost you nothing and some even offer credit.

Using one of these firms to pay your subcontractors is incredibly risky: the entire scheme relies on a sham contract and the hope that HMRC or FIS don’t spot it. The problem for these firms is that they have grown individually and in numbers to the extent that they have come up on the Government's radar.

We would urge anyone using or being approached by companies offering to pay their CIS workforce to look carefully at the contracts. Any mention of the term ‘Commercial Contractor’ should ring alarm bells: a payroll company which says it provides construction services is living on borrowed time.

If you use a payroll company under a sham contract which then defaults on its taxes, the FIS could follow the trail to your door and seek recovery from you - the fact they were a limited company is no longer enough to get you off the hook.

Hudson is the true market leader when it comes to safe engagement of subcontractors: we have a 24 -year trading history and have been tested in law. Our Hudson Contract guarantee indemnifies companies that use freelancers against employment status liabilities.

Using Hudson would pass all due diligence checks that FIS or HMRC may wish to impose. We are happy to give you an honest opinion on your current arrangements in a no-obligation mock-up of the checks we have witnessed FIS and HMRC go through with businesses like yours.