Applying due dilligence principles to supply chains
17 May 2021
There is a clear focus on labour supply chains at present, and the consequences of not taking sufficient steps to ensure that supplies of labour are legitimate. Failure to do so could result in substantial legal, financial, and reputational risks to businesses.
HMRC has issued guidance on the topic, which provides an overview of checks that businesses can apply to assure their labour supply chains. The overarching message is to check the credibility, legitimacy, legal and tax compliance of any suppliers, supplies, customers, employees, and labour supply.
The key principles are as follows:
Businesses should check the following:
- Risks to the business - by performing risk assessments to determine what those risks are and how to mitigate them
- Their compliance with legal, financial and social obligations to safeguard against risks within business supply chains
- Their suppliers’ tax and legal compliance
- The risks of modern slavery and exploitation
Where risks are identified, they should not be ignored, and businesses should take steps to mitigate or remove the risks in full by:
- Acting on risk assessments by setting up effective systems and processes for due diligence
- Knowing their suppliers – not assuming tax compliance and checking the credibility of directors
- Understanding the workforce of suppliers – and the relationship between the workers and the provider of labour
- Understanding the length of their supply chain
- Knowing their suppliers
Effective due diligence requires continual monitoring and review, including:
- Due diligence procedures that are risk-based, reasonable, proportionate and ongoing
- Live risk management to stop or prevent harm before it occurs
The due diligence checks performed will be relevant to each individual business and it is their responsibility to determine which checks are reasonable and proportionate for them to carry out. Completing checks will also ensure that businesses adhere to their legal obligations.
There are some further helpful tips in ten things about due diligence.
In order to understand and approve a supply chain, there are various steps that a business must take and they must ensure that workers are paid properly.
Failure to apply appropriate checks or to act where required can lead to businesses being fined and they could also become liable for any unpaid tax and National Insurance (NI) contributions. They could also be prevented from operating entirely and risk having their reputation damaged substantially.
To ensure the correct due diligence checks are being applied to supply chains, read the guidance in full here.
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