CISR85050 - CIS fraud measures: Section 62B liabilities: ‘Known or Should Have Known’ in this context

Where a person files a return containing a CIS credit claim where they knew or should have known the CIS deduction has not been deducted, the evidence may be relatively straightforward. Indicators include:

  • The person filing the return containing the CIS credit not being a construction business or in the construction industry
  • The invoices they issued to their customers did not relate to construction operations
  • There are no contractor CIS returns showing the person suffered any CIS deductions
  • They cannot provide CIS payment deduction statements, invoices or bank statements that evidence that they suffered CIS deductions

Evidencing that a person makes a CIS credit claim, but before doing so, knew or should have known that the CIS deduction had or would deliberately not be paid by the contractor will require more detailed fact finding. As the supply chain is traced and evidence is collected, evidence should be gathered as to whether the person ‘knew or should have known’ that there would be a deliberate CIS compliance failure, such as:

  • Evidence of the person’s general knowledge of deliberate compliance failures that could occur in the supply chain at the time the transactions took place (see CISR85070)
  • Features of the nature of the payments and/or contracts that would have led the person to question whether they were connected to deliberate compliance failures (see below) and
  • Due diligence and risk assessment carried out by the person to identify and address the risks identified (see CISR85080)

Indicators that would suggest that the person should have known that the transaction was connected with a deliberate failure to comply include:

  • Unsolicited approaches by organisations offering to reduce PAYE/NICs liabilities by CIS credits that had been purchased or by creating CIS deductions
  • The person not being in construction or supplying labour for construction operations
  • The person not registering as a subcontractor for the CIS
  • Unsolicited approaches from organisations with little or no history in construction
  • Directors with no construction experience
  • The introduction of new Special Purpose Vehicles within the supply chain to facilitate the credit offset or repayment
  • Payroll companies or agencies with no physical or online presence
  • Instructions to make payments to third parties or off-shore
  • Use of alternative banking platforms
  • Suspiciously low prices, below realistic labour costs, that appear too good to be true
  • No formal contracts in place despite the deals involving high values
  • Invoices that are higher than expected (higher than payments higher in the supply chain) to take account of the CIS deduction that creates the credit
  • No insurance
  • Back-to-back deals
  • Excessive layers of the supply chain that would result in labour costs only being feasible if tax is not being paid
  • Frequent changes of contractor entities with previous entities that default or go missing
  • Actions taken prior to the contract being agreed with the contractor (e.g. negotiation on price, amount of research, and due diligence, undertaken)
  • Anomalies in the dates/sequence of payments and deductions regarding the construction contract

This list is not exhaustive and will depend on the circumstances surrounding the payments. A combination of factors could lead to the conclusion that the transaction was ‘too good to be true’ and there had been no deduction or no payment on account of liability