CIS : Friend or Foe?

The Construction sector underpins the UK economy and is a lifeblood to many companies for growth, ranking 5th in the UK’s largest sectors in 2021 and employing circa 2.4 billion people (ONS).

In this article, we focus on whether the government tax scheme for the construction industry (Construction Industry Scheme – CIS) is now an appropriate mechanism to pay the temporary workers engaged by contractors, directly or indirectly.

The global economy is presently under a significant amount of turmoil. In the UK, we are still coping with the effects of the Covid-19 pandemic, the Government is focused on recouping significant public spending (estimated to be in the hundreds of billions of pounds). We have a skills shortage within the construction and infrastructure sectors, worsened since the UK exited the EU. Inflation is on the rise and the costs of goods and services impacting not only the projects but also the workers themselves.

In the context of the labour market, we are seeing an increased commitment to improve workers’ pay with employers committing to pay the National Living Wage or the Real Living Wage. This undoubtedly helps the workforce cope with the financial stresses caused by the ‘Cost of Living Crisis’, with workers’ pockets feeling the pinch more than ever. In such circumstances, the risks of tax avoidance become significantly magnified, as workers seek to maximise their net income.

So, in these increasingly challenging and pressured times, surely a government tax scheme, created specifically for the construction industry, is a friend?

The construction industry scheme, having been introduced in 1996 to combat tax evasion, is now becoming outlawed by major public sector infrastructure clients as a scheme under which workers can be engaged, suggesting that it is most definitely foe.

Work done by nutral over the last nine months has highlighted that 50 – 80% of the temporary workforce is engaged under CIS on projects where CIS has been outlawed.

The complexity around allowing CIS as a scheme under which workers are paid lies within the understanding of the risk and how to manage it effectively. Legislative reforms implemented over recent years are starting to become the desired deterrent to contractors who engage workers who operate as “disguised employees”.

It can be a tightrope walk, balancing the need between attraction and retention of the talent needed to ensure projects are delivered on time and budget, and the risk of commercial and reputational damage (potentially irreparable) caused by being caught for tax evasion within the labour chain.

The answer to the question: is CIS friend, or foe? can only really be answered when:

1. The legislation and risks are fully understood.
2. There is visibility of the entire workforce on projects, including how each worker is paid.
3. There is a robust framework, under which the risks can be effectively managed and mitigated.

Risks are defined by a perspective. From our perspective at nutral there is increasing pressure and a genuine desire within the UK to ensure unethical practices are eradicated from the value chain.

With improved clarity provided through reforms to the legislative landscape, risks can now be better understood. The UK Government can impose not insignificant fines and penalties, transfer tax debt up the supply chain and administer custodial sentences for those found to be complicit with tax avoidance.

The Construction Industry Scheme is designed to ensure workers were paid correctly as self-employed contractors, and that tax is collected appropriately and efficiently. However, the scheme has been exploited since it’s creation through numerous ways, which include (but are not limited to):

1. False self-employment: classifying employees as self-employed workers when they are in fact engaged as an employee, under the control, supervision and/or direction of the end user.
2. Fraudulent subcontractors: contractors, make collude with subcontractors who are not registered for the CIS or who have provided false information about their status. This can result in tax be deducted at a lower rate than required, or not at all, resulting in lost revenue for HMRC.
3. Non-payment of tax: some subcontractors may not declare their ratings or pay their taxes, either intentionally, or unintentionally, resulting in lost revenue for the HMRC and the subcontractor open to penalties and Fines.
4. Falsification of records: contractors or subcontractors, by falsifying records, such as invoices or payment receipts, to conceal their ratings or to claim false expenses. This can result in a loss of tax for the HMRC and can lead to penalties and Fines.
5. Miss use of unique reference numbers: the sharing of unique C.I.S. reference numbers using them falsely to claim to be C.I.S. registered. This impacts tax deductions resulting in a tax loss to HMRC.
6. Miss use of unique reference numbers: the sharing of unique C.I.S. reference numbers using them falsely to claim to be C.I.S. registered. This impacts tax deductions resulting in a tax loss to HMRC.

If CIS has been outlawed by public sector infrastructure clients as a means to pay workers, then why is there such a high percentage of the workforce failing to comply with this requirement? The answer may be down to the following reasons:

1. Contractors do not know how the workforce is being engaged, or what employment models are within the temporary workforce.
2. Clients and contractors do not check the subcontract supply chain to understand the make-up of the workforce.
3. Not utilising CIS would result in there being a lack of engagement with temporary workers who are seeking to maximise their take-home pay.

There are several pockets of temporary workforce commonly found within supply chains on construction and infrastructure projects, which include:

1. Workers engaged directly by the client.
2. Workers engaged via labour agency.
3. Workers engaged via a payroll intermediary (umbrella company).
4. Workers engaged via a subcontractor, providing labour-only delivery.

These models require different approaches to ensure they are managed effectively. When considering the above and other methods of engagement for temporary workers (such as Personal Service Companies), it makes workforce management a complex world to understand and manage effectively.

Notwithstanding the complexities of managing the Construction Industry Scheme, the sector is heavily reliant on temporary workers, to the point where the reality is that no major project can be delivered without them.

Whether it is outlawed or accepted, it cannot be managed either way, without visibility of how the workforce is engaged and a robust framework to be able to maintain ongoing compliance.

Nutral is a specialist consultancy and managed service provider to the construction and infrastructure sector. For any advice or information on how nutral can support your organisation, please contact us at hello@nutral.uk.