Protect your business from CIS supply chain fraud

HMRC can hold a CIS contractor liable for tax that a connected party deliberately failed to deduct or pay over, even if the contractor committed no fraud. The question is whether you knew, or should have known, before you paid. HMRC describes the target as businesses that knowingly deal with fraudulent businesses, or ignore clear signs of fraud when nothing else reasonably explains the transaction.

What happens if HMRC acts

HMRC serves a notice of the determination. It is treated like an assessment for appeals and collection, and the amount is due 14 days after the determination is made. HMRC can set a penalty within three years of the determination becoming final.

You have 30 days after a cancellation of gross payment status to appeal it.

HMRC may also deny a business in the chain the right to recover VAT input tax, and charge a penalty for inaccurate returns, if it knew or should have known about labour fraud in the chain.

Check a subcontractor before you engage them

Verifying a subcontractor with HMRC before the first payment is a CIS requirement. It tells you only whether they are registered and what rate to deduct, not whether the business is genuine, so treat it as the first check.

For construction work HMRC also suggests these checks.

• Look the company up at Companies House for its status and directors, and check that its trade matches the work you want done.
• Ask for financial and insurance credentials, and compare the price with the market rate.
• Check workers' qualifications, because workers hired by fraudulent companies may have no Construction Skills Certification Scheme card or may give false details.

Keep checking while the work continues

A one-off check at the start is not enough. Repeat the checks regularly, and verify what people tell you wherever you can.

• Set up Companies House alerts for changes to a company's details, such as its directors.
• Check on site that the number and type of workers match what you were told, sampling workers and businesses independently.
• Verify a subcontractor with HMRC again if you have not included them on a CIS return in the current or last 2 tax years.

Warning signs to investigate

HMRC's guidance lists these as common signs and risk indicators.

• The price is too good to be true.
• The business has no online presence and no physical office address.
• There are no contracts, or the paperwork is inconsistent, for example invoice dates that do not fit.
• The company is new or short-lived and has never held gross payment status.
• The businesses in the chain keep changing, or a company keeps changing its name, a pattern known as phoenixing.
• The directors have no construction experience, or a history of failed businesses or liquidations.
• The supply chain is unusually long.
• Payments arrive from unknown third parties.
• Someone offers kickbacks, suspicious cost savings or promises of minimal tax.
• Payment and deduction statements are inconsistent, incorrect or not provided.
• The company's address, size and experience do not match the service it offers.

One sign does not prove fraud, but it needs an answer before you pay.

If you find a warning sign

Resolve the concern before the payment goes out, because the test looks at what you knew when you paid. Ask the subcontractor to explain, then check the explanation against independent sources such as Companies House and the VAT checker. Write down the sign, your questions, the answers and your decision. If you cannot get a satisfactory explanation, do not go on paying the business.

You can report suspected tax fraud or avoidance to HMRC, including concerns about a supplier or hirer of labour, unpaid VAT or incorrect CIS deductions.

Records to keep

HMRC expects you to keep records of the steps you take. For each subcontractor, keep the verification number and date, the VAT check, the Companies House details, the evidence they gave you and a note of any concern and what you decided. Keep these with your CIS records.