ECJ EUROPEAN Cleaning Journal

Oleg Popov of Cristanval, a cleaning company in Russia, explains how the professional cleaning sector there was in the shadows where taxation was concerned until recently. This has now changed. 

The cleaning sector has been developing in Russia since the late 1990s. Until 2018, it was one of the most opaque industries. Therefore, the tax clean-up of the market was only a matter of time. Taking cleaning out of the shadows turned out to be very painful for all companies.

Where did the whitewashing idea come from? Why cleaning? It’s obvious the Federal Taxation Service (FTS) would be interested in cleaning because millions of euros were flowing past its budget.

In our industry, from the very beginning, it was profitable to work partially bypassing taxes. Urgent problems pushed businesses to use grey schemes. The first is dumping. It was not only possible, but also beneficial due to the imperfections in procurement legislation. There were also problems with protecting competition and ensuring freedom of entrepreneurship. And dumping was encouraged in every possible way by customers. It’s understandable: the effectiveness of managers is calculated not only in the money earned, but also in the money saved. And cleaning, with its grey schemes, was a good way to cut down on costs.

The second problem that pushed many companies to the grey path concerns the logic of pricing. Customers did not buy the labour of a specific number of cleaners, but the cleanliness of a square metre. The ‘cheaper is better’ rule had worked for a long time. The issue of pricing remains relevant now. Whitewashing with a breakdown in the practice of doing business, the forced inclusion of the full tax burden in the cost of services, is bound to affect the price.

Cleaning becomes more expensive. Not all customers can afford the increase in cleaning costs. Those who do not fit into the budget go to the grey market for services. Large companies which are now the focus of the FTS have lost many clients. They want to save money, but the tax authorities threatened these customers that they would also be affected by tax audits.

By the time the tax authorities turned on the cleaning service providers, many companies had been working in a grey scheme, making minimal deductions. According to various estimates, 70–90 per cent of the segment was in the shadows at the start of the whitewashing. This amounted to almost 380 billion rubles (almost €5 billion) in 2018, which is 8.5 per cent more than a year earlier. In these statistics, only the funds visible in the accounting statements are taken into account. In my opinion, the real volume could well have reached 500 billion rubles (more than €6 billion).

Increased prices

In total, according to the FTS (that is, officially), there were about 8,000 cleaning companies working in the country. At the same time, only 500 could be attributed to large and medium-sized businesses. As for people working in the cleaning industry, it is impossible to determine the exact number, because not all of them were registered. According to various sources, there were 0.5-2 million people.

The share of manual labour in cleaning was 60–90 per cent. The specifics of the sector led to the temptation to save on taxes and contributions to social funds. This, of course, could not continue forever, so whitewashing was not a punitive measure. It is a logical and understandable stage in the development of the industry, and the economy.

Coming out from the shadows does not go unnoticed and without losses. Whitewashing changes the balance of power in the market. In four years, the share of grey small players has grown, and this is what we were expecting. Medium and large companies that took the path of whitewashing have lost about half of their customers and at least 40 per cent of their revenue compared to 2018. According to last year’s data, the cleaning companies’ revenue amounted to 277 billion rubles (€3.4 billion). As the tax burden increased, service providers have been raising their prices.

Today large companies pay 21–34 per cent of their revenue to the tax office. Grey small business continue to deduct no more than 10 per cent. This situation creates tax competition. In other categories of costs (salaries, equipment, materials, overhead and administrative costs), it’s impossible to compete. These costs are approximately the same for all cleaning companies.

Why does the grey sector remain when the tax authorities keep an eye on cleaning? The thing is that large companies are the first to be whitewashed in any industry. As soon as they stabilise their tax burden, it will be the turn of small businesses. One way or another, all market players will fall under the whitewashing. Many of them will not be able to cope with the load and will be forced to close. There will be only trustworthy companies that pay taxes in good faith. According to various forecasts, we are talking about 1,000 service providers remaining.

Tax evasion difficult

Obviously it will become more difficult to use grey schemes and evade taxes. Soon the FTS will find out every unscrupulous supplier. That is why “WhiteFM.rf” register was created. A joint project of the FTS and the Association of Cleaning and Facility Operators, it informs customers about the tax indicators of suppliers.

Companies included in the register receive a competitive advantage and the opportunity to participate in major tenders. Customers minimise risks by dealing with reliable firms.
The association’s activities are not limited to the creation and maintenance of a white rating. The range of its tasks and achievements is much wider.

ACFO takes measures to combat unfair competition, conducts dialogue with the state on behalf of business, and develops standards for the production and remuneration of labour. There was no such thing in the cleaning industry before whitewashing.

Several years of whitewashing are behind us, but the most difficult for market players lie ahead. The process seems to have dragged on, so the FTS is going on the offensive. Decisive actions by the tax authorities will leave no chance for grey companies and outright evaders. The tipping point is no longer a question of the future. We are living it now.

I think we will see the results in about a year. Customers will stop agreeing to dumping prices, since such tax optimisation will be too expensive – the risk of tax prosecution is high. Grey companies will sooner or later become white or leave the market.

In the new reality, the cleaning sector will look like this: low profitability (3-5 per cent), high prices, a tax burden close to the ideal and work on the turnover. Also, a new player may appear in the sector – a giant state-owned company. The consequence of its entry into a competitive market will be the reduction of this market by 30-50 per cent.

One key question remains: who will be included in the number of companies remaining on the market after the tax clean-up? Those who initially had the right strategy, a pool of loyal whitewashed clients (they, in fact, keep the business of such companies) and a financial cushion to survive the turbulence all chances to stay afloat.