Due Diligence on your supply chain – Get it wrong and it can cost you!

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Recruitment is not as straightforward as matching people to job roles. People outside the sector often overlook the fact that recruiting is complex and highly regulated. After all, there’s nothing as complex as people!

Unfortunately, there are some unscrupulous recruiters out there, and those who are simply naïve to the background of their labour supply chains, especially in the temporary recruitment arena where it’s high volume placements, often at a quick turnaround.

That’s why it’s vital to perform checks and due diligence on your workers and the relevant supply chains.

With advice from the Government and HMRC, here’s a condensed list of 10 things you need to know. Remember though, this is an overview, and your checks will vary on how your business is set-up and the sector you work in.

  1. One of your first steps when setting up or growing your agency is to perform reasonable due diligence. If you skip this vital step, it opens your business up to significant legal and financial risks. Not only that but your reputation will suffer – in fact, your company may never get off the ground. Failure to carry out the right checks could stop your business from operating. Get expert advice on which checks are necessary, when you should carry them out, and how frequently. Keep accurate records of your background checks in case they are needed by the HMRC or for auditing purposes.
  2. Look out for VAT registration. Aside from the human side of providing workers, your financials need to be well above board. If you knowingly (or even unknowingly) enter arrangements that are connected with VAT fraud, then you might not be able to recover any tax paid on these transactions.
  3. When it comes to labour being supplied, make sure you are fully in the loop about where your workers are coming from, their right to work, how payments are being made. This should all be legal and in line with industry and legislative guidelines – absolutely no cutting corners!
  4. Workers should all be paid fairly for the work they do across the time they do it. Rates should comply with National Minimum Wage legislation.
  5. Keeping payments in mind, ensure who (if not you) is responsible for making the relevant tax and National Insurance contributions. This is relevant if you use a recruitment agency or you are supplying temporary labour. Keep in mind you could be liable for unpaid PAYE and NI contributions if you can’t prove otherwise and if these are not accounted for.
  6. If a deal comes your way that seems too good to be true, then this should set alarm bells ringing. It might be a sign of worker exploitation, illegal operations, or even modern slavery. Not only is the humane side of this plain wrong but it’s unlikely the labour supplier is meeting their tax commitments. Always ensure your labour supply is commercially sustainable.
  7. Keep in mind the construction arena has different rules that apply. The Construction Industry Scheme (or CIS as it is more widely known) calculates and pays relevant tax for contractors and workers on construction sites. If you ignore or fail to follow the CIS rules you might find yourself in line for some hefty fines plus interest on backdated payments.
  8. Anyone working with contract staff should have heard of IR35 legislation or ‘off-payroll’ working rules. If you work with contractors who operate through their own intermediary (often a personal limited company) you need to check whether the off-payroll working rules apply. This is currently applicable to public sector bodies where you need to check who should operate PAYE if applicable. From 6 April 2021, the rules extend to medium and large-sized private or voluntary sector organisations.  
  9. If you outsource payroll or you are working with employees through a third party, you must carry out due diligence around what rules apply. 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.
  10. Bringing the tips back to tax and financials, this is a crucial point to avoid legal action or crippling financial penalties. It is an offence for a business to fail to prevent (or indeed to enable) tax evasion. Make sure you have processes in place to prevent the criminal facilitation of tax evasion.

Doing things right and putting in the legwork with your due diligence means you will avoid prosecution and financial penalties, and you’ll be able to keep trading. It might feel like a wave of paperwork and processes to start with but trust us; it will be worth it in the long run when you have created a legitimate, sustainable and growing recruitment practice.