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
2006
2007
2008
2009
2010
2011
2012
VALUE OF CONSTRUCTION ACTIVITY
€38.631 billion
€35.08 billion
€25.795 billion
€16.06 billion
€11.374 billion
€9.12 billion
€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 people1 were
working. The most recent figures for direct construction employment are from Q4 2012,
when the total level of employment was recorded as being 103,2002.
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
1
CSO Quarterly National Household Survey
CSO Quarterly National Household Survey
3 PQ response from Minister for Social Protection Joan Burton, 29 th January 2013.
2
out of business with as many as 4214 construction companies becoming insolvent in
2011, 4155 in 2012 and as of 1st April 2013 as many as 906 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.
4
Insolvency Journal figures (April 2013)
Insolvency Journal figures (April 2013)
6 Insolvency Journal figures (April 2013)
5
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 to subsidize 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.
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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.
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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.