HMRC's new guidance on labour providers explained

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Photo of Justine Ricccomini By Justine Riccomini, Head of Taxation (Scottish Taxes, Employment and ICAS Tax Community)

7 June 2017

HMRC has published an update to its guidance on labour supply the repercussions for illegal working practices, fraud and exploitation of workers are severe.

Reputational damage may now be the least of an employer’s problems. Employers in any sector using labour supply networks, including Construction Industry Scheme and workers supplied through intermediaries, take heed …

HMRC’s updated guidance supplements existing Home Office provisions which sanction fining employers up to £20,000 per illegal worker and handing down prison sentences of up to five years for employing people who do not have a right to work in the UK.

It is vital employers abide by the guidance, which covers four key areas:

  1. Employers must undertake background checks on their labour suppliers to ensure they have no history of non-compliance such as illegal working or non-compliance with National Minimum/Living Wage legislation.
  2. The employer must be able to confirm that it understands the full extent of the labour chain and approves of it – some kind of policy and demonstrable ongoing checking procedure would ideally be in place here.
  3. The employer must be aware of the contractual hourly/daily rate of all its agency workers and ensure this complies with National Minimum/Living Wage legislation – even if it is not the ultimate payer of the workers.
  4. The employer should set up a policy to demonstrate that it is proactively addressing the eradication of modern slavery and illegal working in its supply chains.

Guilty unless proven innocent

The starting point to this new guidance is that HMRC will by default assume that an employer connected to a fraudulent or illegal working practices/non-compliant supply chain activity is complicit unless it can prove otherwise.

VAT fraud – what did the employer know?

Furthermore, if VAT fraud is discovered within this supply chain, the employer will also be implicated and must be able to robustly demonstrate that it was not involved and could not have been aware of the fraudulent activity.

PAYE and NICs risk

As the ultimate employer of the workers, an employer may be presented with a bill for underpaid income tax and NICs should the supply chain not yield the correct amount.

Tough stance on NMW/NLW failures remains

Nothing has changed on the National Minimum or Living Wage front – the legislation provides for a tough stance on this already, with criminal sanctions, provisions for penalties of up to 200% of the amount underpaid and immediate repayment of arrears to the workers plus a naming campaign by HMRC of the employer, which has negatively affected the reputations of some businesses to date.

The guidance from HMRC also provides useful links to areas such as the Association of Labour Providers, UK Visa and Immigration Guidance, The Modern Slavery Act 2015 and VAT verification.

Keep records

Most vital of all is that an employer keeps a map of its decision-making process and justification of its actions.

Topics

  • Tax

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