In recent years, HMRC has intensified its scrutiny of the construction industry, with a particular focus on tax avoidance and fraud involving complex supply chains. One of the areas of growing concern is in the Labour Supply arena – where unpaid VAT, CIS liabilities, or payroll taxes in the labour supply chain are recycled, leaving the main contractor exposed.
The reality is stark: if you are a contractor and your supply chain fails to meet its obligations, HMRC can (and often will) pass the liability up the chain to you, unless you have taken reasonable care.
Understanding the Supply Chain failure Effect
The fraud arises when fraudulent or non-compliant labour supply companies fail to pay their VAT or CIS deductions to HMRC. These companies often disappear without trace, but because they were part of your chain, HMRC may pursue your business for the missing tax.
What makes this particularly dangerous is that businesses often believe they have no liability once they’ve paid their Labour supplier – but HMRC takes a different view.
Expert View: Andy McKenna, Disclosure Specialist
Andy McKenna, a former HMRC investigator and now disclosure case specialist at DSC Metropolitan, has seen the impact of a supply chain failure from both sides of the fence.
“Contractors often underestimate HMRC’s powers. The reality is that HMRC doesn’t just stop at the company that defaults; they will pursue whoever they believe ‘should have known’ that something wasn’t right in the chain. If your supplier isn’t paying CIS or VAT to HMRC, you could be the one footing the bill – plus penalties and interest. Prevention and proactive due diligence are the only real defences.”
Andy stresses that businesses must treat compliance not as an afterthought but as a core risk management process.
Case Study: A Painful Lesson for a Mid-Sized Contractor
Take the example of a regional construction firm employing 120 staff and engaging around 200 workers on a major housing development.
The firm hired a labour supply agency to provide additional groundworkers. For months, everything looked fine – invoices were paid, workers showed up, and the project progressed. But a year later, HMRC launched an enquiry.
It turned out the labour agency had not paid over £750,000 in VAT and CIS deductions. The company had since dissolved, leaving no funds to recover. HMRC argued that the main contractor had failed to carry out sufficient due diligence on the Labour Supply and transferred the liability to them.
The result? A crippling unexpected bill, additional penalties, and severe cash flow disruption that almost forced the contractor into insolvency. If the Company had gone into liquidation, HMRC would have then pursued the Directors to recover the unpaid taxes.
The case underlines the importance of carrying out thorough due diligence checks on every supplier, every time and continuing to do so throughout the engagement.
Protecting Your Business
Contractors should put in place:
- Supplier due diligence – Check VAT registration, CIS compliance, and the company and its Directors history.
- Clear contracts – Ensure the contracts distinguish between payroll services, staff supply, and genuine labour supply.
- Ongoing monitoring – Don’t just check once; compliance must be reviewed regularly.
- Staff training – Ensure finance, HR, and procurement teams are trained to spot red flags in labour supply and payroll arrangements.
Andy McKenna notes:
“The cost of prevention is far less than the cost of a Revenue investigation. Contractors need to remember that HMRC is increasingly looking for examples to make a point – don’t be the next headline.”
How We Can Help
At DSC Metropolitan, we work with contractors across the UK to ensure their labour supply chains are watertight. Our services include:
- Independent due diligence reviews of your supply chain
- Compliance and anti-fraud training for your staff
- Implementation of best-practice processes to reduce risk
- Expert support from former HMRC specialists who understand how investigations work
With our guidance and training, you’ll be better equipped to keep your business protected and compliant.
If you are in the construction industry and want to discuss how these issues may affect your business, contact us in confidence.
