We recently asked our experts what their thoughts on the use of “Sham Contracts” and the risks involved with using them and why they are bad for the freelancers in the construction industry.

Gerard Howard, Financial Director of Howard Civil Engineering said this;

There are inherent risks that all industry’s face, the most prevalent I feel is cash flow. The management of cash flow is imperative to ensure that a company succeeds. According to Euler Hermes Quarterly Overdue Payments Report late payments in the construction industry rose by 27% in 2015, this reinforces the challenges company’s face in cash generation, thus having a direct impact on company’s ability to make payments.

The greatest cash strain on a company is labour expenditure that is invariably paid weekly and can account for anything between 20% - 25% of a company’s turnover. Given the shortage of resource within construction it’s essential to retain the services of these operatives by ensuring they are paid on time, every time. There are various vehicles to remunerate operatives including, direct payments, umbrella and third party payroll companies. Whilst mitigating administrative burdens on the company it can also increase the potential risks of them not conforming to what they purport to do both financially and in compliance with legislation.

Given that these payroll companies are to be paid in advance of any payments made to the operatives, there’s the obvious risk of them folding the company without paying the operatives. This would leave the client company in the position of having to pay the operatives twice.

Given the pressure within the media of tax compliance, utilising the services of a reputable company is essential to mitigate any potential legal issues that a company may face.