Due diligence in the labour supply chain

HMRC remain focused on policing the labour supply chain due diligence area in the face of ever-increasing concerns over the exploitation of labour and avoidance of paying the correct amount of taxes.

Basic meaning of due diligence

Due diligence means in essence taking precautionary steps and making suitable enquiries to identify any risks associated with another company or business with whom you may wish to enter an agreement or contract.

When looking at the labour supply chain, this would mean as an example; is the business who they say they are, are the properly registered for VAT, paying its dues, and not involved in any fraudulent evasion of tax?

What is expected

There is no strict definition of what due diligence checks must be carried out. HMRC will not tell a business what checks it should undertake although it is not uncommon for HMRC to point out any shortcomings it believes it has identified in a business records.

HMRC will look to consider all circumstances relating to specific transactions (especially where fraud is considered applicable) to establish if the business knew or should have known that the transaction(s) was connected to fraud. 

Part of this process will involve HMRC looking at what due diligence checks were carried out and whether those checks were suitable and designed to address any specific risks identified. The expectation from HMRC is that a business will make a judgement on the integrity of their supply chain after undertaking reasonable due diligence checks.

What procedures should be in place

Due diligence procedures should be risk-based, relevant, reasonable, proportionate, and most importantly ongoing. Whilst it may be advisable to have a standard framework of due diligence checks a business undertakes, as each customer or supplier is different those checks may need to be tailored to that specific business.

Businesses should identify which checks are appropriate, when to carry them out and how often.  Detailed records should be kept of all checks made.

What areas are at risk?

In addition to VAT risks within labour supply chains, HMRC may look to review other taxes that could also be considered to be at risk, and this for example could include:

• Failure to operate PAYE/National Insurance Contributions (NIC) correctly and remit these deductions to HMRC
• Failure to operate the Construction Industry Scheme (CIS) correctly
• National Minimum Wage failures
• Section 44 Agency Regulations and employment intermediary reporting requirements
• Obligations regarding the IR35 off-payroll working rules

What action might HMRC take regarding liabilities identified

If errors are identified that result in an underpayment of tax(s) HMRC will usually initially look to the business that they have under review.

However, where fraud in a supply chain is potentially suspected or establish HMRC can look to seek to recovery VAT from other parties (businesses) within that chain, such as refusing claims for input tax.

Unlike VAT, other potential tax compliance liabilities such as underpaid PAYE/NIC or failure to operate CIS the responsibility sits with the defaulting business. There are certain circumstances where specific tax and NIC liabilities could be transferred to another party, but this is dependent on the relevant tax and NIC underpaid and the reason(s) for the default.

How can The Guild help?

The Guild has in-house ex-HMRC Employer Compliance and CIS experts who can help you with an HMRC enquiry, whether at the outset of the review or at a point where HMRC demands are escalating.