Cash settlements: Morally wrong?

Treasury Minister David Gauke certainly lit the touch paper when he claimed in July that it was "morally wrong" to pay tradesmen such as plumbers, builders and cleaners in cash in the hope of avoiding tax.

It is estimated that the government loses £2bn each year to the black economy as tradesmen fail to pay VAT or income tax by not declaring payments and keeping them off the books.

Many commentators responded angrily to a lecture on morality from an MP. Others debated the intricacies and inconsistencies of the British tax system.

Many good tradesmen pointed out that cash-in-hand is more often demanded by customers than offered, and is not that useful to their businesses anyway.

But, whatever your view, it raises an interesting point for the insurance industry to contemplate.

Recent studies show that about 60% of all buildings insurance claims are settled in cash as opposed to a managed fulfilment solution.

It's fair to say that cash settlements increased because some of the networks were greedy, took too long on jobs and created too many complaints. But that's not the case today.

Do you arrange for claims settlement payments directly to the policyholder? If so, do you know whether the remedial work will be done at all? How will you check whether the quality of the work is to a satisfactory standard or the appropriate taxes are being paid?

If you arrange for claims settlement payment directly to the policyholder's builder or contractor, do you verify the contractor's UTR number?

Under the rules of HMRC's Construction Industry Scheme, you should be making the necessary tax deductions, paying the tax to HMRC, providing the contractor with a tax deduction statement and sending monthly CIS returns to HMRC.

Access to trusted, compliant and competent tradesmen in the UK also continues to be a challenge for many home owners and policyholders.

The possibility that 60% of claims settlements are going to fund work by firms found only through Google or Yellow Pages, and may be paid for in cash, and with almost certainly no contract or come back in case of poor workmanship, should be a major cause for concern.

Recent cases upheld by the Financial Ombudsman Service have also concluded that, when insurers have adopted cash settlement solutions, they retain certain liabilities.

For example, even if the policyholder chose the repairer entirely independently, the insurer will be responsible for rectifying deficiencies in the work if the insurer or its agents have controlled the repairer, such as requiring the repairer to cut their costs or to use certain materials or parts as a result of the cash settlement.

Settlement solutions have evolved over many years, but the current trend towards cash may soon attract the interest of the taxman and regulators.

Even if you're not likely to debate the morality of the situation at the next board meeting, every insurer needs to ask: are our claims solutions compliant?

Paul Hayman, managing director, MA Assist