Off-payroll: Guidance on checking labour supply chains

08 October 2020

HMRC has updated its guidance on off-payroll working, to give details of applying due diligence principles to labour supply chains. Ahead of the off-payroll working reforms, which will be implemented from 6 April 2021, this information has been provided, as failure to take reasonable action in this area could potentially lead to substantial legal, financial and reputational risks to businesses. In some cases, it could even result in companies needing to cease operations entirely.

A business could end up being responsible for unpaid taxes and National Insurance (NI) contributions. In addition to this, they may not be able to recover VAT payments, and individuals could even be prosecuted and handed unlimited fines if someone acting on their behalf allows tax evasion. These labour supply chain checks are also imperative in protecting workers and preventing modern slavery.

Labour supply chain due diligence checks

Due diligence should be performed to ensure that businesses are able to make judgements on transactions and the integrity of their supply chains. It will mean that businesses are protected by assessing the credibility, legitimacy, legal and tax compliance of any suppliers, customers, employees and labour supply.

Criminal practices such as exploitation, fraud and avoidance can be more easily disguised within a supply chain in scenarios where due diligence has not been performed by all parties, so checks conducted solely in relation to immediate suppliers and customers may not be enough. Credibility of the supply, payment arrangements and other surrounding circumstances should also be considered.

Supply chain due diligence principles of checking, acting and reviewing will allow businesses to apply effective risk management and sufficient due diligence to ensure the integrity of supply chains, which will subsequently reduce the level of exposure to risks.

There are three main principles relating to supply chain due diligence:

  • Check:
    • Risks by performing risk assessments, understanding what they are and how to mitigate them
    • The business’ own compliance with legal, financial and social obligations
    • The tax and legal compliance of suppliers
    • To eliminate modern slavery and exploitation risks, check for published slavery and human trafficking statements, and for indicators of modern slavery and exploitation
  • Act:
    • Act on risk assessments by setting up effective systems and processes for due diligence
    • Know suppliers – check the credibility of directors and verify signatories of contract negotiations, for example
    • Know the workforce of suppliers – understand the relationship between the workers and the provider of labour
    • Identify how long the supply chain is
    • Know the suppliers of those within the supply chain
  • Review:
    • Due diligence needs to be continuously monitored and reviewed
    • Due diligence procedures need to be reviewed
    • Live risk management needs to be monitored

The guidance provides much more detailed information on the principles, and surrounding guidelines. There is also discussion of what happens in scenarios where appropriate action is not taken to ensure due diligence within supply chains.


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