Use of labour providers

    In today’s economic climate, businesses are always looking to minimise costs and risk. Quite often, staff costs will represent a large proportion of the business’ regular financial outlay and as such, it is no surprise that many have considered the use of third party labour providers in an attempt to reduce costs in this area, as opposed to the more typical situation where many businesses have historically used their accountancy provider to process their payrolls. 

    Whilst the use of labour providers may initially appear to the business to represent savings in terms of time, cost and risk, the reality of the situation is potentially quite the opposite and can result in serious consequences for the business.

    We are currently representing a number of businesses who have been approached by HMRC as a result of having entered into a staff outsourcing arrangement with one or more providers. These letters are headed ‘Check of PAYE/NICs and VAT Records' and are being sent to the business, and former employer. 

    The letters are issued by HMRC’s Fraud Investigation Service unit, with the clear message that the outsourced provider has not remitted all PAYE and NIC due in respect of the employees to HMRC. Concern is also raised regarding the amount of VAT remitted to HMRC.

    The letters are asking the business to provide records and information in relation to the arrangement with the third party provider. The letter also makes reference to HMRC’s advice regarding due diligence when entering into agreements with labour providers.

    Importantly, the letter also asks the question: “Please provide details of all due diligence checks that were undertaken.”

    HMRC’s expectations regarding what constitutes due diligence is set out below:

    Undertake checks on your labour supply chain

    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 four 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.

    You can view HMRC's full advice on due diligence here.

    In our discussions with HMRC we have established that due to the serious nature of the enquiries, HMRC have prioritised early interventions to minimise the tax at risk. In order to resolve matters the officers are instructed to seek an early meeting with the business owner and their representatives, typically within two weeks of receipt of the records requested in their initial letter. 

    It is important to recognise the seriousness of these enquiries and to treat the letters accordingly, taking action without delay. 

    We believe that it is vital for business owners and their advisors to consider carefully all aspects of the engagement between the business and labour provider. We always advise that businesses carry out the necessary due diligence prior to entering into one of these arrangements. 

    If your clients have already been involved in such an arrangement, in our opinion it is essential that they revisit the arrangements to ensure that adequate due diligence is/has been carried out.

    We specialise in assisting businesses that are under enquiry. We have a proven track record of successfully resolving disputes and have built up a wealth of experience in this specialist area. 

    Jacqui Mann and Nigel Nordone, two of our senior tax consultants, are experienced tax professionals with strong backgrounds in dealing with HMRC enquiries and PAYE matters. As such, they can assist businesses who are in receipt of these letters, or who have concerns regarding the use of labour providers to outsource payroll responsibilities. 

    For further information on how we can assist you with issues surrounding tax enquiries, please contact Nigel Nordone or Jacqueline Mann on 0345 223 2727.