Black Economy and the Construction Industry

Submission to the Joint Oireachtas Committee on Jobs, Enterprise and Innovation

By the Construction Industry Federation (CIF)

Overview of the construction industry

The construction industry in the Republic of Ireland has gone through a dramatic period of decline over the last six years. Activity in the industry had been valued at €38.631 billion in 2006. However that activity has experienced significant levels of decline in the period since:

YEAR / VALUE OF CONSTRUCTION ACTIVITY
2006 / €38.631 billion
2007 / €35.08 billion
2008 / €25.795 billion
2009 / €16.06 billion
2010 / €11.374 billion
2011 / €9.12 billion
2012 / €8.68 billion

(CIF figures)

In six years the value of activity in the sector has experienced a drop of approximately €30 billion.

The decline in activity has had major implications for our industry. There has been an enormous decline in the level of direct construction employment. The peak of direct construction employment was reached in Q2 2007 when a total of 273,900 people[1] were working. The most recent figures for direct construction employment are from Q4 2012, when the total level of employment was recorded as being 103,200[2].

According to those figures the level of direct construction employment has experienced a decline of 170,700 jobs. The CIF estimates that when indirect employment and ancillary jobs are added in, the decline in the construction industry has resulted in a loss of approximately 250,000 jobs.

It is also worth noting that according to the Government’s own figures, “One in four persons on the Live Register – some 109,000 persons – is a former construction worker.”[3]

The severely decreased level of activity in the sector has made the business environment extremely difficult for Irish construction companies. Many have been forced out of business with as many as 421[4] construction companies becoming insolvent in 2011, 415[5] in 2012 and as of 1st April 2013 as many as 90[6] construction companies had become insolvent already this year.

In the face of such difficult conditions, the competition for work has become fierce. In order to stay afloat companies need to secure work – otherwise they will have no income to meet the continuing expenditures of their businesses. Across the industry company cash flows and reserves have been used up.

Tender prices in the industry are being forced lower and lower as construction companies do everything they can to ensure they secure a project. In an environment where there is a race to the lowest possible tender price – which is what is happening in the construction industry – then some people start looking at ways in which they can gain an edge on their competition.

This can sometimes involve bringing in more efficient and effective building or business practices.

However there is a considerable belief in the construction industry that there are a number of construction companies and single construction operatives who are turning to the black economy.

Black economy in the construction sector

What constitutes black economy activity in the construction sector? Simply put it is work that is carried out outside the scope of the relevant regulations facing the industry and with no regard to compliance with building standards, revenue compliance or health and safety standards.

The most obvious examples of this type of activity involve construction work that is not tax compliant and/ or carried out by individuals who are receiving social welfare benefits for jobseekers simultaneously.

Unfortunately there is a lot of anecdotal evidence to suggest that some construction companies and construction operatives are not fully meeting their tax obligations. On certain jobs, there is a belief that the VAT is not being charged to clients. There is also a belief that in some cases the taxes are being applied to the project client but once this has been paid to the construction operator the relevant payments are not being passed on to Revenue.

There is also a belief among construction companies that some of their competitors are paying their workers in cash outside of the tax system.

These various examples of black economy activity are sometimes used tosubsidize the work that is being carried out, allowing the construction operative or construction company to provide a lower tender price.

The misuse of social welfare payments is also a serious problem for the construction sector. A large portion of construction employment is temporary in nature. Construction workers may be employed only for the duration of a particular project. In some cases this can be for long term projects, but in other cases it might only be for a few weeks or days.

The uncertainty of the length of employment makes it more difficult to police whether an individual is working or not. Many CIF members have suggested that this uncertainty is being exploited by people who are misusing the social welfare system.

The anecdotal evidence would suggest that certain construction operatives are claiming Jobseekers Allowance while still securing work on the side, which they are not declaring. The Jobseekers Allowance payment provides a subsidy to the construction operative. As they are topping up their income through other means it provides them with a greater margin for the project which enables them to offer a lower tender when they are competing for work.

It has also been suggested that some construction companies are encouraging workers they use to make use of the Jobseekers Allowance payments. These workers might receive a cash payment for the work they carry out for the construction company while at the same time receiving the full Jobseekers Allowance payment. The work is kept off the books, making it more difficult to follow any paper trail and stop this practice. As the workers are receiving the Jobseekers Allowance the construction company does not have to provide as large a wage as might otherwise be expected – effectively they are using the social welfare system to subsidise their wage expenditure.

This method also allows construction companies and construction operatives to avoid their PRSI and other regulatory obligations.

It is also worth noting that another area whereby some construction operatives and construction companies engage in black economy activity is by not complying with the health and safety requirements for the industry. Not observing these regulations is another way for some construction operatives to cut corners and reduce costs. This has implications for the construction company involved, their employees, their clients and anyone who might be in proximity to an unsafe construction site. By not observing the proper health and safety regulations the likelihood for accidents, injuries and even fatalities greatly increases.

The CIF and others involved in the construction industry would also have considered construction companies that do not comply with the wage rates and other employment conditions set down under the Registered Employment Agreement (REA) as engaging in black economy activity. However on Thursday 9th May 2013 the Supreme Court found a section of the Industrial Relations Act of 1946 unconstitutional and this has significant implications for the implementation of the industry agreement. Given this ruling and the uncertainty concerning the future of the REA process for determination of wage rates and associated costs, the issue of payment of former REA industry rates of pay is not addressed in this submission.

Perception of the black economy in the construction industry

To help provide a stronger impression of the extent of the black economy problem in the construction industry, the CIF undertook a survey of our members on this issue last summer. The findings of this survey were quite revealing and help illustrate how much a cause of concern this activity is to our sector and how widespread the problem seems to be at present.

The findings of that survey included:

  • 76 percent of construction companies had come across black economy operations in the previous 3 months.
  • 85 percent of construction companies had also come across an increased number of black economy operations in the previous 12 months.
  • Almost 20 percent of construction companies believed that black economy activity in the construction sector has grown by more than 100 percent since the downturn began.
  • 52 percent of construction companies believed they have lost more than 5 jobs to black economy operations in the previous 12 months.
  • Just under one in four construction companies indicated an awareness of public contracts being awarded to black economy operations.
  • 98.5 percent of construction companies believed black economy operators pay their workers with cash outside of the tax system.
  • Almost one in two construction companies have come across clients who have experienced problems with black economy operators or the work they have carried out and 39 percent had been asked to repair work carried out by a black economy construction operative.
  • 56 percent believed that the materials used by black economy operators are lower in quality.
  • 93 percent believed the Government needs to take stronger action to regulate black economy operators in the construction industry.
  • 74 percent believed the Revenue Commissioners should be responsible for ensuring regulations to combat the black economy are enforced.

The CIF intends to carry out a fresh version of this survey in the coming weeks.
Suggestions for tackling the black economy in the construction industry

The CIF believes measures to stamp out black economy activity in the construction sector should be introduced. In the current economic climate it is important that all construction companies and sole traders act responsibly and comply with all the legal obligations. No one should be avoiding their taxation requirements or misusing social welfare payments.

The CIF has prepared the following suggestions which we believe would have a considerable impact on the level of black economy activity in the construction sector.

  • All construction clients should advise the Revenue of the commencement and identification of contractors employed for any construction project over a certain value.
  • Payment of buildings grants if any and other incentives should be made conditional on the work being carried out by tax compliant contractors.
  • A mandatory site notice displaying names of client, contractor(s), professionals, and planning reference numbers for all projects over a certain size should apply.
  • Tax assessment and relief should be made contingent on the provision of a certificate of building costs, which would identify all relevant building contractors.
  • Revenue should review all commencement notices lodged with building control authorities to ascertain location/scale of construction activity and monitor who is undertaking the construction work.
  • The banking system should be obliged to notify Revenue of all significant cash withdrawals/ loan draw downs processed so that Revenue can then investigate who has been paid for work undertaken.
  • In relation to fuel laundering, a mechanism should be prescribed whereby all diesel fuel would carry the same duty levels at point of sale so that compliant trade users can recover VAT in the normal course of business.
  • Provide a facility to enable homeowners reclaim the VAT incurred on costs associated with the renovation and upgrade of their principal private residence.
  • Provide a facility whereby taxpayers could have their personal tax allowance increased by a proportion of the construction costs incurred in the renovation and upgrade of their principal private residence where registered contractor(s) who provide their tax reference numbers are engaged.
  • An information campaign should be undertaken by government similar to the Insurance Fraud Campaign to assist in stamping out shadow economy activities.
  • Where a private individual / entity is to engage a company or individual to undertake construction related work on their home or other structure, private individuals / other entities should be obliged to check if the construction company or person undertaking the works has a valid C2 for works above a certain figure, and to notify Revenue accordingly.

Advice to the public for avoiding black economy operatives

Feedback provided by members indicates that many of those individuals, householders and businesses who have engaged black economy construction workers have done so unwittingly. Generally the clients who have hired these operatives are unaware that the construction workers they engage could be operating outside of the tax provisions and labour regulations. This suggests these people are funding the black economy in the construction sector without realising it.

To help avoid future engagement of black economy operations, the CIF has prepared the following points to help individuals, householders and businesses to ensure they are dealing with legitimate construction operatives who are tax compliant and who obey the relevant construction regulations and standards. We hope by encouraging the adoption of these measures it will decrease the level of black economy activity in the construction industry.

  • Ask for a contract. Legitimate contractors will be able to assist you with a contract which will set out your obligations and the obligations of the construction firm.
  • Ask for a VAT number. All construction work is subject to VAT. Therefore all legitimate construction companies and operatives should have a VAT number. Legitimate construction companies will have no problem supplying a VAT number when requested. If any problems persist with the construction operative then the best course of action is to contact the Office of the Revenue Commissioners.
  • Check if they have a C2 certificate. This is the relevant tax clearance certificate provided to construction companies by the Revenue Commissioners.
  • Ask about where the construction materials came from.Black economy operatives are less likely to use high quality materials. If the work involves construction materials ask for details of where the materials being used came from. A receipt which shows the materials came from a recognised building supplier usually means better quality materials are being used.
  • Ask if they have certified health and safety standards.Those that operate in the black economy are unlikely to be compliant with the relevant health and safety standards when it comes to undertaking construction work. If the construction operative is certified and has a safety statement they are more likely to be a fully compliant operation. A safety statement is a legal requirement for all employers detailing how they manage safety issues.
  • Check if they have insurance.In the unfortunate event of an accident occurring involving construction work being undertaken, the client can be sued by the injured party. If the construction operative does not have insurance this increases the level of liability the client could face.
  • Ask if they are members of the CIF.CIF members are fully aware of the various regulations and are required to be tax compliant and abide by the laws regulating the construction industry.

Conclusion

The CIF would like to thank the members of the Joint Oireachtas Committee for Jobs, Enterprise and Innovation for taking the time to investigate this subject. The Committee deserves a lot of praise for shining a light on the issue of the black economy, both in the construction sector as well as in the wider economy. We are honoured to have been invited to appear before the Committee and to discuss this issue with the members.

The CIF would like to offer our assistance to the members of the Committee on any other work they are doing on this matter. If there is any further information we can provide please do not hesitate to contact us.

We look forward to reading the Committee’s recommendations on this subject later in the year.

ENDS.

[1] CSO Quarterly National Household Survey

[2] CSO Quarterly National Household Survey

[3] PQ response from Minister for Social Protection Joan Burton, 29th January 2013.

[4] Insolvency Journal figures (April 2013)

[5] Insolvency Journal figures (April 2013)

[6] Insolvency Journal figures (April 2013)