Guidance

10 things about due diligence: supply chain assurance

Updated 13 May 2021

Overview

You need to know about performing due diligence checks on your labour supply chains.

10 things you need to know

This list is not exhaustive and will vary depending on how your business operates.

1. Failure to perform reasonable due diligence checks can lead to significant legal, financial and reputational risks to your business, or even prevent your business from operating entirely – you should identify which checks are appropriate, when to carry them out and how often. You must make sure that you keep a detailed record of all checks made.
2. Make sure your labour supplier is legitimate – you should do checks to understand where your workers are coming from, how they’re being paid and the legitimacy of those arrangements.
3. Verify the VAT registration of your labour suppliers. If it can be shown that you knew or should’ve known that transactions you entered in to were connected with VAT fraud, then you may lose the right to recover the tax paid on these transactions.
4. Make sure your labour supply is commercially sustainable. If the business charge is too low the supplier is unlikely to be able to meet its statutory tax obligations and make a profit. It may also be an indicator of exploitation, modern slavery or illegal working.
5. Check if workers are being paid the correct rate – you must check that workers are being paid their contractual rate and that this complies with the National Minimum Wage legislation.
6. If you are operating within construction, check that you understand the rules of the Construction Industry Scheme (CIS). Failure to follow CIS rules may result in you paying CIS deductions that have not been correctly accounted for plus interest and fines. HMRC may also cancel your gross payment registration.
7. Be aware of your obligations if you outsource your payroll or are engaging employees through a third party. Check whether travel and subsistence arrangements and employment intermediary reporting comply with HMRC requirements and if agency rules apply to agency workers being treated as self-employed.
8. You could be making yourself liable for unpaid taxes and National Insurance contributions. If you use agency or temporary workers or are an agency providing workers, you must check who should operate PAYE. You may become liable for unpaid PAYE and National Insurance contributions if these are not accounted for correctly.
9. Be aware of your obligations where an individual works through their own intermediary, usually a limited company, or personal service company – if you are a public sector body you will need to decide if the off-payroll working rules apply and check who should operate PAYE if applicable. If you are a medium or large-sized private or voluntary sector organisation, from 6 April 2021 you will also need to check whether the off-payroll working rules apply.
10. Be aware of offences for corporate failure to prevent the criminal facilitation of tax evasion. Organisations should consider putting in place reasonable procedures to prevent the criminal facilitation of tax evasion by anyone acting on their behalf. Failure to do so may result in prosecution and unlimited fines.

Companies or partnerships can ‘self report’ if they have failed to prevent the facilitation of tax evasion.

More Information

More information can be found in the advice on applying supply chain due diligence principles to assure your labour supply chains guide.