Businesses that use temporary labour, particularly in construction, logistics, care, manufacturing and cleaning for example, face a very different compliance environment in 2026. HMRC has made one thing clear: if you use a non-compliant staffing agency, you will potentially carry the risk.
Not the agency.
Not the intermediary.
You.
This shift is already underway through HMRC’s Labour Supply Chain Compliance (LSCC) programme. In 2026, activity will intensify as HMRC targets labour fraud, tax loss, and disguised employment at scale.
If your business relies on agency workers, here’s what you need to know – and what you must review your supplier engagement process and act now.
Why HMRC Is Targeting Labour Supply Chains
HMRC estimates that billions are lost each year through:
- unpaid PAYE and NIC
- VAT fraud within supply chains
- “phoenix” agencies that close before tax is due
- offshore or unregistered intermediaries
- payroll outsourcing used to disguise non-compliant models
This has led to an enforcement model where HMRC focuses less on the agency and more on the business benefiting from the labour.
In other words: if you engaged the labour, you should have checked the supply chain. That is now HMRC’s working assumption.
What’s Changing in 2025
HMRC has already signalled several shifts in approach:
- More in-person visits
Officers are now conducting unannounced site inspections at construction sites, warehouses and manufacturing plants.
They ask three things:
- Who supplied the labour?
- How were they paid?
- Show us your due-diligence records.
- Letters warning businesses to stop using certain suppliers
HMRC already sends “cease using” letters when an agency is believed to be non-compliant.
If you ignore the warning, and do not improve your due diligence, then the liability potentially passes to you.
- Joint and several liability
If any part of your labour supply chain fails to pay PAYE, NIC or VAT, HMRC can transfer the debt to your business.
- Higher expectations for due diligence
Basic checks are not enough. HMRC now expects a structured, risk-based process documented each time you onboard or renew an agency relationship. Which is continued throughout that engagement.
- Focus on Managed Service Companies (MSC) and outsourcing
Some staffing agencies are rebadging as “outsourced payroll services” or “umbrella companies”.
HMRC is now clear: if the model hides tax risk, the engager is still on the hook.
Is Your Staffing Agency Putting You at Risk? Red Flags to Check Today
You should be concerned if:
- the agency offers rates “too good to be true”
- workers discuss receiving unusually high net pay
- payslips lack employer information
- the agency frequently changes company name or bank account
- offshore payment models are involved
- the agency cannot clearly explain its PAYE model
- your business has received a warning letter about a supplier
- the agency refuses to provide due-diligence documentation
Any one of these makes your business exposed to back-dated tax assessments, penalties, and reputational damage.
What HMRC Expects You To Do
- Verify the agency
You should be able to show:
- UK registration
- VAT status
- PAYE schemes
- physical trading address
- UTR verification
- director identity checks
- Understand the payment model
Umbrella? PAYE? Outsourced payroll? Multilayer models?
If you cannot explain it, HMRC will assume you failed to check it.
- Review payslips
Random sampling of worker payslips is now considered good practice.
- Check how the agency funds payroll
Agencies with poor cashflow are high-risk. Payment delays to workers are a major warning sign.
- Keep full audit trails
HMRC routinely asks for:
- onboarding due-diligence
- ongoing reviews
- contracts
- payslip samples
- invoices
- payment trails
No paperwork = assumed negligence.
What Happens If You Don’t Comply
If HMRC decides your agency has not paid the correct taxes, they will chase you for the unpaid amounts.
Typical assessments include:
- PAYE arrears
- NIC
- penalties up to 100%
- interest
- VAT liabilities
- potential criminal investigation in serious cases
We have seen HMRC apply this even when the contractor didn’t know the agency was non-compliant.
Ignorance is not a defence.
Due diligence is.
How DSC Metropolitan Helps Protect Your Business
DSC Metropolitan works with contractors, developers, staffing firms and labour-heavy businesses to strengthen supply-chain compliance.
Our support includes:
- supply-chain due-diligence audits
- review of agency contracts and payment models
- risk scoring of all labour suppliers
- training for internal teams
- documentation packs to show HMRC
- support during HMRC visits and enquiries
- advice on outsourcing and payroll structures
As Andy McKenna, tax investigations specialist at DSC Metropolitan, explains:
“HMRC expects businesses to check labour supply chains as if they were tax investigators themselves. If you can’t evidence the checks, HMRC assumes you never did them. The business and the Directors may be exposed to an unexpected liability.”
This shift means every business using temporary labour must strengthen its controls now –before HMRC comes knocking.
Final Thoughts
2025 will see the toughest enforcement yet on labour supply chains. Whether you use a single staffing agency or multiple intermediaries, the responsibility sits with you.
If you’re unsure:
- whether your agency is compliant,
- whether your current checks are enough, or
- whether your paperwork would protect you in an enquiry,
now is the time to review your systems.
DSC Metropolitan can help you put the right structures in place so your business is protected, not exposed.
If you’d like a confidential discussion or a review of your labour supply chain, get in touch.
