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Who should read this
If you use labour supplied by a third party then this information will help you understand how to safeguard your business from financial and reputational risk whilst maintaining the flexible workforce you need.
Undertake checks on your labour supply chain
HM Revenue and Customs (HMRC) continues to find non-compliance, illegal working practices and fraud in labour supply chains across business sectors.
We are committed to tackling non-compliance, fraud and illegal working practices so that we fund essential UK services, stop modern slavery, and create a level playing field for all those businesses complying.
You should protect your business by undertaking checks to understand:
- where your workers are coming from
- how they’re being paid
- the legitimacy of those arrangements
We can’t tell you exactly what checks you should make because these will vary depending on how your business operates.
What to check
You need to undertake checks within 4 key areas to ensure:
- your supplier of labour is legitimate and has no history of non-compliance
- you understand and approve the labour supply chain
- agency workers are paid their contractual rate and it complies with the National Living Wage (NLW)/National Minimum Wage (NMW)
- you’re doing all you can to eradicate modern slavery and illegal working in your supply chains
These checks are not exhaustive.
If you don’t undertake checks
You need to be aware of the following:
If HMRC finds non-compliance or fraud in your supply chain
It’s likely to cost you more. If it can be shown that you knew or should’ve known that transactions you entered in to were connected with fraudulent evasion of VAT, you’ll lose the right to recover the tax paid on these transactions.
Failure to carry out appropriate checks will be one of the factors that HMRC will take into account in considering whether you knew or should’ve known of the VAT fraud.
You may be liable for unpaid taxes and National Insurance contributions (NICs)
HMRC may ask you to account for unpaid tax and NICs. For example, if an offshore agency supplies you with workers and they don’t account for tax and NICs payable through the PAYE system, then you may have to.
Your risk of reputational damage
Customers, shareholders and the media expect transparent tax planning and value low risk behaviour towards tax contributions. If you take part in non-compliant supply chains whether directly or by association, your commercial relationships may be compromised, affecting your ability to maintain contracts.
NLW/NMW and falsified payment records
It’s a criminal offence if HMRC finds that an employer hasn’t been paying workers the correct rate or falsifying payment records. Arrears have to be paid back immediately. There’ll also be a penalty of up to 200% and offenders may be named and shamed in the press by the government.
If you’re operating within construction
You need to follow Construction Industry Scheme (CIS) rules. If you don’t you may have to pay any CIS deductions that haven’t been correctly accounted for plus interest and penalties. If you’re a CIS subcontractor with registration to be paid gross, we may cancel that registration.
Guidelines to help you undertake the checks
You need to identify which checks are appropriate to protect your business and the services provided by third party suppliers. You will decide when you’ll carry them out, and how often.
The examples given are guidelines to help you avoid getting involved with high-risk businesses and individuals.
Make sure you keep a detailed record of all the checks you undertake.
Make sure your supplier is legitimate and doesn’t have a history of non-compliance
Checks that can help you find out include:
- making sure your labour supply is commercially sustainable so it can meet statutory tax obligations and make a profit
- checking the history of the labour supply business - if a previous business failed because it didn’t pay its tax debts, what changed to stop this happening again
- adding a clause in the contract requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments they’ve made to HMRC
- checking that appropriate licences are held and in order, for example a Gangmaster Licensing Authority (GLA) licence or a Security Industry Authority (SIA) licence
- verifying the suppliers’ VAT registration details by calling Telephone: 03000 538254 before you use them and making regular checks of all VAT registration numbers afterwards
- telling HMRC about your payroll or staffing outsourcing arrangements
Make sure you understand and are able to approve the supply chain
Actions you can take to help you establish this include:
- adding a clause in the contract requiring your authorisation of further sub-contracting before any of the supplies to be made are sub-contracted to a third party labour provider
- adding a clause in the contract that travel and subsistence arrangements between the workers and the labour supplier comply with HMRC
- adding a clause in the contract preventing the use of offshore intermediaries
- where workers supplied by agencies are being treated as self-employed, decide if the agency rules apply
- ensuring the agency has complied with employment intermediary reporting requirements and get evidence of submitted reports to HMRC where they don’t operate PAYE (this includes where they use an umbrella company)
Agency workers’ pay
Ensure agency workers are paid their contractual rate and that it complies with the NLW/NMW.
The checks that can help you establish this include:
- checking workers are actually paid their contractual rate, that it complies with the NLW/NMW and the latest rates have been used
- any business charging less than the suggested hourly cost of supply suggests unsustainable practices - please check with the Association of Labour providers for the latest rates
- take a sample check of agency worker’s pay slips
- checking that the PAYE reference is the right one for business you consider to be the employer
- checking that expenses are genuine and not presented to avoid paying the NLW/NMW
Eradicating modern slavery and illegal working in your supply chains
To help you establish this you’ll need to be aware of the modern slavery indicators.
You have a legal obligation to check that an individual is allowed to work in the UK before they’re employed as well as ensuring they aren’t breaching any visa restrictions.
A National Insurance number is not proof of identity or right to work in the UK – you should ensure document checking follows UK Visa and Immigration guidance.
Employers can be fined for employing illegal workers and could even be sent to jail and receive a fine if found to have knowingly employed an illegal worker.
The Modern Slavery Act 2015 requires every organisation carrying on a business in the UK with a total annual turnover of £36 million or more to produce a slavery and human trafficking statement for each financial year. The statement must set out what steps they’ve taken during the financial year to make sure modern slavery isn’t happening in their supply chains/own organisation.
Tell HMRC about your payroll outsourcing
Organised fraud in labour provision presents a risk to the public revenue.
HMRC would like to help your business to report any concerns about payroll or staffing outsourcing you already use or are considering using. HMRC will check if the company submits returns and pays tax and NICs for your employees, however HMRC may be unable to tell you the result of these checks.
Telling HMRC about these arrangements is voluntary and is not the same as employment intermediary reporting. Complete the online form PAYE: report payroll outsourcing if your business:
- is not an employment intermediary company
- outsources staff including CIS subcontractors to an outsourcing company such as a payroll, umbrella or intermediary company, and
- the outsourcing company assumes responsibility for both making returns and remitting tax to HMRC in their company name
Verifying VAT registration details
You can call HMRC on Telephone: 03000 538254, Monday to Friday, 8am to 4pm to check the VAT status of labour providers that you’re working with. You should have your own details and the following suppliers information to hand:
- trading address
- VAT registration number (VRN)
You may be asked additional questions about the suppliers such as contact details, director’s names, additional addresses, supply dates, numbers of staff supplied, payment method.
There is also the facility for you to submit requests via email to firstname.lastname@example.org.
You must provide the following information:
- your name and telephone number
- the business you are representing
- VRN of the business you are representing
- the name, trading address, postcode and VRN of the business you are verifying
- the contact name(s) and telephone number of the business you are verifying
- date the supply of labour commenced
- date of cessation (if known)
- number of staff supplied
- if payments are made through a third party, for example factoring - please provide full details of any factoring company used
- if this business replaces a previous one, please provide the name, address and VRN
Reporting concerns about potential compliance issues
If you have information concerns about a supplier/engager of labour or associated activities, contact the HMRC hotline. It’s open 24 hours a day, 7 days a week.
You can also report someone if you think they’re evading tax.
Reporting concerns about exploitation
If you have concerns and someone is in immediate danger call 999.
Otherwise you should contact:
Crimestoppers on Telephone: 0800 555 111
Modern Slavery Helpline on Telephone: 0800 0121 700
Gangmasters Licensing Authority Confidential reporting line on Telephone: 0800 432 0804
ACAS Helpline on Telephone: 0300 123 1100
Health and Safety Executive for serious injury or fatality only:
- out of hours Telephone: 0151 922 9235
- office hours Telephone: 0845 300 9923