How should you audit your labour supply chain?

How should you audit your labour supply chain?

Oct 05, 2022

Workwell News

Claire Parker - National Functionality Designer

Claire Parker

National Functionality Designer

In recent times, we’ve witnessed many changes regarding the use of temporary labour in the UK. Following the government’s recent decision to repeal the off-payroll reforms from both the private and public sectors, the supply of temporary workers in the UK will continue to be a rollercoaster ride for a while longer.


Nevertheless, while businesses may take a collective sigh of relief at the prospect of removing their responsibility to conduct IR35 status determinations, other legislation and risks remain steadfast in the background.

While the off-payroll reforms have taken the headlines, HMRC has continuously reiterated its need for engagers of temporary workers to conduct robust due diligence on their supply chain.

Other pieces of legislation, such as the Criminal Finances Act 2017 and Managed Service Company legislation, represent considerable risks to engagers of temporary labour. The risk of complicity or lack of reasonable care concerning those in the supply chain is apparent and severe.

So, our question is this.

Is your temporary labour supply chain compliant?


How do you know if your labour supply chain is compliant?

Unless you know what legislation applies and carry out checks and due diligence on an ongoing basis, you won’t know whether your suppliers are compliant or not.

The temporary labour supply chain can be complex, with a chain of suppliers conducting different functions. Supply chains can include managed service providers (MSPs), recruitment agencies, umbrella or payroll companies, and personal service companies.

Unless you understand the breadth and depth of your supply chain, it’s unlikely that you will know whether it is compliant or not. Unfortunately for engagers, this is where the biggest risk lies.

The umbrella sector (companies that payroll contractors on behalf of agencies and engagers) has long been touted as a hotbed of tax avoidance by HMRC. However, for many engagers, there is a degree of ignorance as to whether umbrella companies are active in their supply chain.

Other engagers rely on indemnity clauses or agreements with MSPs to protect their position and justify their lack of awareness. Unfortunately, such clauses and agreements have been proven ineffective when tested in court.

In our experience, being in either of the above situations carries significant risk which is why our holistic suite of contingent workforce management solutions comprises IR35 and tax risk services.


How do engagers of temporary labour mitigate risk?

In straightforward terms, our answer to mitigating risk is to take advice and be proactive.

Suppose you engage temporary workers via an intermediary (MSP, agency etc.). In that case, HMRC will expect you to take reasonable care and conduct due diligence in understanding those involved in the supply of the temporary worker.

HMRC will also expect you to take any action necessary to help deter or prevent any tax avoidance activities.

In light of these expectations, we would work with you to audit your supply chain, getting clarity on the following questions to ensure due diligence:

  • Are you aware of all suppliers in your temporary labour supply chain?
  • Have any suppliers in your supply chain ever been charged with tax evasion?
  • Do you know the employment status of your temporary worker?
  • Do you know who employs your temporary worker?
  • Do you know how your temporary worker is paid?
  • Do you know if your temporary worker’s pay is treated in line with the UK’s PAYE scheme?


If your answer is no, don’t know, or I assume to any of these questions, then we would work with you to put in place the necessary checks and balances to ensure compliance.

A lack of knowledge or awareness of the above points is unlikely to meet HMRC’s due diligence expectations or reasonable care. It could represent a significant risk to your business, which is why we partner for the long-term to provide ongoing advice and support around compliance.

The diagram below shows a typical labour supply chain audit workflow.

due diligence in labour supply chains infographic


Concerned about the risk that using temporary labour poses?

The UK and international temporary labour markets have laws and regulations that guide and govern the sector. However, the umbrella sector that plays a significant supporting role in temporary labour supply in the UK is largely unregulated. The FCSA offers voluntary regulation and its thorough process of independent audit demonstrates a commitment to compliance amongst all who carry the standard. Workwell was a founding member of the FCSA and among the first to be accredited.

Despite this, there is a significant risk associated with engaging temporary workers via an intermediary unless you have done your due diligence to ensure your supply chain comprises only compliant providers.

Business owners and Directors of companies that engage a temporary worker via a supplier involved in any kind of tax evasion, either with or without their knowledge, could be found guilty of facilitation or complicity.

Demonstrating that reasonable care has been taken to understand the structure of the supply chain, along with actions to avoid involvement or association with any fraudulent or criminal activities, will significantly, if not completely mitigate the risk.


Next steps

If you would like support to understand your compliance obligations further, and to conduct a due diligence audit, please speak to our supply chain compliance experts.


Andrew Webster

[email protected]

07827 810851




Stuart Marquis

[email protected]

07791 153741

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