COMPLIANCE
For larger businesses, often reliant on contractual arrangements to inform them of supply chain integrity, we point to: l contractual design l upward reporting of information l the importance of verifying details provided by others, which might be on a sample basis. Without regular scrutiny of the chain during the contract, opportunities for non-compliance can be exploited and risks might go unnoticed for some time. As well as having reliable information to assess and review risk, enforcement procedures for addressing concerns effectively, and in a timely manner, are critical and can mitigate the potential impact. For example, reducing the risk of disruption to operations and minimising the amount of tax losses and associated HMRC intervention. Robust supply chain assurance is important for all businesses in a chain because they’re connected through their transactions, meaning the way workers are engaged, and the compliance of associated businesses, can have implications for everyone. For example, legitimate businesses in the chain could face additional liabilities and associated penalties, such as the denial of value added tax input tax by HMRC, where fraud has taken place. There’s also the risk of reputational damage for businesses, through negative stakeholder comments and media coverage, or the effect on service provision where supply chains are disrupted, and how they might be viewed by future customers. It’s important to consider the potential impact of LSC risks in the context of social harm too. Where income tax and National Insurance contributions aren’t paid to HMRC correctly, this can affect workers’ ability to claim benefits such as the state pension and could leave them with a personal tax bill. In some cases of organised labour fraud, we also see people being recruited as directors (sometimes referred to as ‘patsy’ directors) who don’t always realise the potential implications of their involvement in contrived supply chains. From a wider perspective, there can be a risk of worker exploitation through illegal working, modern slavery and human trafficking. Workers may not be aware of issues or be in a position to report them. This could
be due to coercion, language barriers and lack of access to reporting procedures.
It’s important that businesses can spot potential risk indicators and that there are procedures in place for people to report concerns, which are then acted on appropriately. When thinking about HR and payroll functions, the information processed could indicate potential risks, for example, disguised remuneration, where all or part of an individual’s pay is shown as ‘not subject to tax’. If workers query their pay, engagement or raise concerns, this could highlight wider risk. Whether sub-contracting services, engaging workers directly or delivering payroll functions, all businesses involved in LSC activity have a part to play in minimising opportunities for exploitation of chains and protecting workers. While HMRC tackles defaulters directly and takes enforcement action to recover tax losses, the guidelines form part of how we’re working with businesses and other organisations, with the aim of making the labour market fairer and safer for legitimate businesses and people. More information on GfCs GfCs are a suite of guidelines produced by HMRC for businesses and their advisers. They make clear our view on complex, widely misunderstood or novel areas of the tax rules. They may apply to any tax or duty administered by HMRC, or to an issue that involves more than one tax or duty. The goal is to extend these publications beyond interpretation of the law, helping customers understand our expectations and get taxes right first time. We share our view of risks, highlighting approaches which may lead to errors and possible HMRC assessments. We share practical approaches to lower the risk of being non-compliant. Following the guidelines helps businesses to avoid unnecessary contact from us and to adopt a lower risk tax strategy, reducing the likelihood of adjustments to tax returns, and the application of interest and penalties. HMRC has currently published 12 GfC products on GOV.UK. You can see them all here: https://ow.ly/LLVf50VReKN. The guidelines include best practice on settlement agreements, the apprenticeship levy and off-payroll working rules (IR35). You can email the GfC team at ccgguidelinesforcompliance@hmrc.gov.uk. We’re interested in hearing your feedback, questions and ideas on existing and future guidelines. n
“Without regular scrutiny of the chain during the contract, opportunities for non-compliance can be exploited and risks might go unnoticed for some time”
Payroll processes as part of supply chain assurance
Payroll activities are clearly a fundamental part of ensuring workers are paid correctly, and a core business process, in terms of meeting legal requirements to support supply chain assurance, whether undertaken in-house or as an outsourced service. HMRC encourages all businesses to consider how they might integrate existing areas of risk management and information, to strengthen their understanding and management of worker engagement. For payroll activities, in addition to quality assurance and ensuring tax compliance, this might include how information is shared between finance, human resources (HR), procurement and tax teams. For example, are staff trained to recognise possible risk indicators and are there reporting procedures in place for them to raise concerns? Where payroll services are being provided to a customer, the ability to demonstrate robust internal practices can give confidence in the integrity of the payroll provider and help with assurance of the overall chain. Businesses sitting towards the top of supply chains need to understand how chains are structured, as well as how workers are engaged and paid, to inform decision-making and risk management practices. The guidelines include examples of the type of information businesses should obtain about their chains and the workforce. The ability to check and verify payslips, payment methods and worker contracts are recommended as part of this (which might be on a sample basis for larger workforces), so payroll providers should anticipate potential requests for this type of information.
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| Professional in Payroll, Pensions and Reward |
Issue 112 | July-August 2025
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