The Construction Industry is not like any other industry. It’s a basket-case. It is totally dependent upon trade creditors to carry out the work, and financiers to lend it money, yet, with the help of some new government intervention and some of its own, it contrives to make it more and more difficult for these stake-holders to recover in the event of insolvency. No wonder bankers with their fixed charges shy away. 

CIS

Since 2007 the industry has lost some 270,000 jobs. To coincide with this decline, changes in the Construction Industry Scheme (a form of tax clearance certification) introduced in 2007 by the Income Tax (Construction Industry Scheme) Regulations 2005 mean that, most frequently, HMRC gets the first 20% of collections, without those realisations ever passing through the hands of an insolvency practitioner - a “super-duper” priority. 

This has come about by removal of the exception in s.8.7 of the old IR14/15 in the new CIS340 rules which no longer exempt payments to liquidators, receivers and administrators from the Scheme (although arguably administrators under EA 2002 were never exempt). 

As a result, if an insolvent sub-contractor loses its exempt CIS status – which is highly probable if it has debts due to HMRC - or didn’t have exempt status in the first place, the debtor (assuming it also to be in the Scheme) must deduct 20% from the payment (excluding the cost of materials) and account for this monthly to HMRC. If the sub-contractor went into insolvency before the new CIS, the deduction will be 30%. This is entirely at odds with the public policy manifest in the EA 2002 by the abolition of Crown preference, and creates a new super-duper preference. To rub salt in the wound, the CIS tax lost by the creditors doesn’t even qualify as an expense in the insolvency like other taxes. 

VAT

The industry widely utilises “Self-Billing Agreements”, whereby the sub-contractor is required to agree that any invoice he issues is void and that the VAT tax point is the date of Insolvency Today Magazine Opinion Piece for May 2012 

2 RPA Docs/1000/The Builder, the Stakeholder, and the Super-Duper Taxman.doc 

payment. As an alternative to a VAT invoice from the sub-contractor, the main contractor will issue a “VAT Authenticated Receipt” which sets the tax point. This is all very well whilst the sub-contractor is trading but, following insolvency, self-billed receipts qualify as “post-appointment trading” so VAT received will have to be accounted in the insolvent sub-contractor’s VAT return despite the work having been completed perhaps years before insolvency. Hence, whilst it could benefit from the VAT insolvency exemption in the Value Added Tax Regulations 1995, the industry largely chooses not to. As a result, recovery is reduced by VAT paid to HMRC, which could be retained for creditors. 

20% CIS + 20% VAT = 33.33% of realisations to the super-duper taxman.

WTF

To cap it all, main-contractors increasingly draft their sub-contracts such that, in the event of sub-contractor insolvency, no further payment is due until 12 years from completion of the entire project or, as written into some sub-contracts, no further payment is due ever! Of course, this position is not sustainable as it contravenes long-standing principles of public policy and insolvency law. However, in the face of such lunacy, how can the industry expect a funder to lend money with an expectation of waiting 12 years to recover in the event of failure? 

QED

There is a better way. . . 

Late, non- and under-payment is rife, as is lack of a proper understanding of the contract terms, which presents a short-lived opportunity to capitalise on the contractual and implied rights possessed by the sub-contractor before insolvency, and before rights to payment disappear under the “Melville Dundas” rule. But this does entail doing a bit of work pre-appointment. Thankfully, this has become easier since the Insolvency (Amendment) Rules 2010. Insolvency Today Magazine Opinion Piece for May 2012 

3 RPA Docs/1000/The Builder, the Stakeholder, and the Super-Duper Taxman.doc 

In the meantime the (solvent) sub-contractor’s position has also been strengthened by the revised payment rules in the Local Democracy, Economic Development and Construction Act 2009 which came into force in October 2011 and is implied into all construction contracts since, and a new suite of standard contracts across the industry. Properly done, and with a fair wind, the pre-appointment investment will dramatically change the outcome of the insolvency such that those elusive book debts, retentions and even the WIP can be realised after all. 

A basket-case, certainly: A dead loss, no. 

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RPAssoc Willmott Dixon launches early pay scheme | Online News Building Magazine. Does this mean less available for the QFCH and creditors ???