HMRC are continuing to crack down on suspected fraud in labour supply chains. If you hire external labour such as agency workers or contractors in your company or outsource your payroll, labour supply chain due diligence is critical to avoid being liable for unpaid taxes, National Insurance contributions, fines and penalties.

Organised labour fraud (OLF) and due diligence

There are three main types of fraud that HMRC categorises as Organised Labour Fraud (OLF) and these are:

1. Payroll company fraud – this happens when a business transfers staff and payroll responsibilities to a fraudulent entity that are masquerading as a payroll company. This payroll company then supplies staff back to the business but doesn’t pay income tax, NI or VAT to HMRC. Often, the cost low, so the outsourcing proposition is attractive for businesses looking to reduce their administrative costs.
2. Mini-umbrella fraud – This is where a temporary workforce is provided via a series of small, limited companies, each with a few employees, rather than a single umbrella company. The micro companies then abuse the employment allowance and VAT flat rate scheme.
3. Construction labour fraud – This is where abuse of the Construction Industry Scheme (CIS) happens by moving labour related VAT and income tax liabilities into shell companies that then default on payments to HMRC.

How to assure your labour supply chain

Performing adequate due diligence will enable you to make a judgement on the integrity of your labour supply chain.  HMRC are not clear or prescriptive on what this type of due diligence should look like but offer some guidance on the HMRC website.

Supply chain due diligence principles

HMRC state that you should check, act and review constantly your labour supply chain. You can see more detail of the HMRC guidance on supply chain due diligence principles here.

They recommend that you carry out due diligence checks to help safeguard your business from financial, operational and reputational risks. You must decide what checks are relevant, reasonable and proportionate for your own business, when you’ll carry them out, and how often.

This is particularly important if your business uses labour supplied by a third party such as an agency, contractor or sub-contractor, or if you outsource your payroll service.

You should carry out initial checks on new relationships, carry out robust due diligence checks being mindful of the potential risks you are seeking to eliminate, and regularly monitor and review these checks. You will need to understand the chain of supply, not just the entity you are contracting with.

Make sure you keep a detailed record of all the checks you do.

10 things about supply chain due diligence

This list is produced by HMRC and is not exhaustive and will depend on your own business.

1. Identify for your own business which checks are appropriate and how often you carry them out.
2. Understand where your workers come from, how they are being paid and how legitimate those arrangements are.
3. Verify the VAT registrations of your labour suppliers periodically using HMRC’s VAT number checker. Labour suppliers often do not pay the VAT you have paid them over to HMRC, and you may not be able to claim back the VAT on payments you’ve made if you know, or should have known, that fraud was involved in the supply.
4. If you think your labour supply is commercially unviable (i.e. they are charging very low rates), then this should be a flag that the arrangement may not be commercial, the supplier may not be able to meet its statutory obligations and/or may indicate exploitation.
5. Check workers you hire are being paid a correct contractual rate and that it complies with National Minimum Wage legislation.
6. If you are within the construction sector, ensure you understand the rules of the Construction Industry Scheme (CIS).
7. Be aware of your obligations, even if you outsource your payroll to a third party company.
8. Understand that you may be liable for unpaid taxes and National Insurance Contributions, so check who should operate PAYE and if they are being accounted for correctly.
9. If you employ individuals that operate their own limited company or personal service company (PSC), check if off-payroll working rules/agency rules apply.
10. Be aware of offences for corporate failure to prevent the criminal facilitation of tax evasion and put in procedures to prevent your company being part of this.

Things to look out for

This type of fraud can contain common traits, such as one or some of the things below:

• Companies with a short life span (12-18 months) and another entity taking their place.
• Stealing or hijacking of VAT registration, CIS registration and PAYE scheme numbers.
• Long supply chains.
• Large rises in turnover and quickly accrued debts in the companies concerned.
• Suspect directors history.
• Low rates.
• Low cost outsourcing or schemes described as “tax efficient”.

Summary

HMRC is committed to tackling non-compliance, fraud and illegal working practices in labour supply chains. If HMRC finds non-compliance within your supply chain the outcome is likely to cost you more through being liable for unpaid taxes, fines or penalties if you have not carried out and evidenced sufficient due diligence checks. Therefore, if you use agency or temporary workers, our outsourced payroll services, you need to put in place due diligence checks on those workers and the supply chains providing them. Report any concerns you have about potential compliance issues early.

You can get more information from the following sources:

10 things about due diligence

Mini umbrella company fraud

Joint and several liability for unpaid VAT (VAT Notice 726)

How to spot missing trader VAT fraud