On Jan. 16, UK HMRC issued rules on understanding labor chain risks.
UK HMRC expects all businesses to meet their legal requirements; position in a chain and decisions on tax treatment, whilst engaging a workforce through some labor supply chains, can directly affect tax compliance of the some companies concerned.
Position Overview
UK HMRC published 3 guidance documents on labor supply chain assurance (GfC12), with the first providing help with understanding some of the labor supply chain risks.
For example, failing to treat Construction Industry Scheme (CIS) payments correctly as contractor, could possibly result in more tax liability relating to any underpayment.
In addition to this, association with other businesses in the supply chains can result in potential financial and reputational implications for all firms if they are non-compliant.
Labor supply chain risks could result in reputational damage due to a direct or indirect association with issues like modern slavery and tax fraud, among other potential risks.
It could mean loss of workforce if UK HMRC or other agencies remove workforces from site, disrupting supply chains or taken criminal action that could affect firms directly.
In addition, enforcement implications relating to a firm's own compliance can have a negative effect, as well as affecting a businesses association with others in the chain.
This first guidance document also identifies the victims of labor supply chain risks.
Potential Implications
The second document titled Potential implications for businesses, details enforcement action and financial impacts to businesses, where UK HMRC assesses tax that has been diverted through non-compliance and raises determinations of liability, taking action.
Interest and penalties may also be charged which increase the financial implications.
In addition to a liability, the methods UK HMRC can take to recover tax losses, like compulsory freezing, and winding up orders can result in disruption to operations.
The document also provides information on other issues, such as denial of VAT input tax, criminal charges, and appearance on the UK HMRC list of deliberate tax defaulters.
Recommended Approach
The third document provides information on principles and activities that firms can use to help strengthen supply chain assurance practices, including examples of checks that can be done as part of due diligence, and information used to inform risk assessment.
Businesses will already have assurance practices in place to help identify, assess and manage various risks across supply chains, and UK HMRC recommends reviewing them and strengthening them, like adapting them to give information on labor supply chains.
Diversity, scale and complexity of a larger business’s operations and supply chains do mean each business must decide what to do, to assure itself of the ongoing integrity.
The document provides more detail on due diligence, on examples of check as part of due diligence, on risk assessments, on risk management, and senior commitment.
