Any business using labour providers, or involved in a supply chain which uses labour providers, must ensure they have read and followed the due diligence guidance which HMRC have just updated. Typically, contractors in the construction industry, who use labour provided by another business will be effected. If the contractor is building new homes and regularly claims VAT repayments, they are particularly vulnerable to HMRC reviewing the due diligence checks they have undertaken on their supply chain. Repayments have been withheld where HMRC felt that the contractor has not checked the supply chain thoroughly enough.
Are you up to date with HMRC guidance?
HMRC have issued updated guidance on the checks which they expect businesses to undertake, not only into their immediate suppliers and customers, but ensuring they have a full understanding of the supply chain they are part of. If the due diligence undertaken is not demonstrably robust, HMRC can withhold VAT repayments, remove gross payment status or even cancel your VAT registration.
The principles of assuring your supply chain are set out below. The details on how HMRC expect you to do this are given in the updated guidance and their ’10 things about due diligence document’
The purpose of the due diligence checks is to ensure that all parties in the supply chain fully comply with tax and reporting obligations, workers are paid the National Minimum Wage and are not subject to modern slavery. HMRC will look to withhold VAT repayments and hold all of those in a supply chain liable for tax and national insurance contributions which are unpaid. They are also able to freeze bank accounts and revoke licences.
Supply chain due diligence principles
The Principles are not a definitive checklist but are good practice examples of what businesses can do to minimise risks in their supply chains.
Know your own risk – legal, financial, tax and social obligations, and those of your suppliers. You can check:
- Your risks by performing risk assessments to understand what they are and how to mitigate them;
- Your own compliance with legal, financial and social obligations to safeguard against risks within business supply chains;
- Your suppliers’ tax and legal compliance, for example, submitting their tax returns and payments on time, complying with legal and social responsibilities, and having reasonable procedures to prevent the criminal facilitation of UK and foreign tax evasion, as per the Corporate Criminal Offences brought in by the Criminal Finance Act 2017; and
- For modern slavery and exploitation risks, for example, check for published slavery and human trafficking statements and for indicators of modern slavery and exploitation.
Carry out robust due diligence on your suppliers. If risks are identified do not ignore them, act to mitigate or remove the risk completely by:
- Acting on your risk assessment by setting up effective systems and processes for due diligence;
- Knowing your suppliers – do not assume tax compliance, be vigilant for previous business failures or possible criminal intent. Check the credibility of directors and verify signatories of contract negotiations and documents are accountable office holders;
- Knowing your suppliers workforce – understand what the relationship is between the workers and the provider of the labour, for example:
- Who provides the workers;
- Who the workers are;
- What their employment status is;
- Who is responsible for making sure how they are paid and how much;
- If there is any indication of exploitation including modern slavery; and
- Are they allowed to work in the UK.
- Knowing how long your supply chain is – margins become tighter with every layer of subcontracting and opportunities increase for fraudulent infiltration of supply chains so be vigilant – check that the supplier actually exists (for example, by looking for commercial features) and check details of any onward subcontracting; and
- Knowing their suppliers – due diligence applies throughout supply chains – one aim of due diligence and risk assessment is to enable the taxable person to make a judgement on the integrity of their supply chain and the suppliers, customers and goods within it, for example, you may lose the right to recover the tax paid on transactions connected with the fraudulent evasion of VAT if you failed to carry out appropriate checks.
Effective due diligence needs continuous monitoring and review which includes:
- Due diligence procedures – these should be risk-based, relevant, reasonable, proportionate and most importantly, ongoing.
- Live risk management – this can stop or prevent harm before it occurs, for example it will provide added protection against denial of input tax.
- It is recommended that you carry out due diligence checks to help safeguard your business from financial, operational and reputational risks. You must decide what checks are relevant, reasonable and proportionate for your own business – when you’ll carry them out, and how often. However, these checks will need to be more extensive in business sectors where there are greater commercial risks or vulnerability to fraud and other criminality.
Completing these checks will also help satisfy a number of your legal obligations.
This is particularly important if your business uses labour supplied by a third party such as an agency, contractor or sub-contractor, or if you outsource your payroll service.
The checks required to satisfy all of the principles above are in depth and will be time consuming to undertake. Once completed, at the outset of a new contract, they should be repeated regularly to ensure that the information held is still current.
Failure to complete the checks and maintain adequate records to show they have been done, could result in withheld VAT repayments, which will undoubtedly cause cash flow problems and impact the reputation of the business.
If you would like advice on implementing a system of due diligence checks, please contact the Menzies VAT team, as below.
How can we help?
VAT rules are complex and the implications are often not considered until too late. We believe that VAT planning requires in-depth specialist knowledge, as even the most conscientious can get caught out, which can be costly.
Our dedicated VAT team can help you to consider the full impact of VAT through all stages of your business, from considering a new activity, through to acquisitions, overseas expansion and disposal of part of the business.
We will help you to plan robustly, minimise your exposure and optimise your cash flow position.
For further information on the services we provide, please contact our VAT Advisory team.