Due Diligence in temporary labour supply chains

Due diligence is the process that companies utilising temporary labour providers (such as agencies and contracting intermediaries) should follow to identify and manage risk temporary labour supply chains which could threaten the viability of contracts with other parties and the integrity of the business.

How can Aspire help with your Due Diligence?

• Preparation of a Due Diligence Policy
• Review of existing Due Diligence processes
• Undertake audits of due diligence performed
• Provide training on due diligence

What is the risk of not performing adequate due diligence?

Due diligence is a company’s only means of preventing being involved in a non-compliant temporary labour supply chain.

If HMRC deem a temporary labour supply chain to be fraudulent then it could lead to financial repercussions for those higher in the supply chain.

VAT fraud or the evasion of VAT is a rife point of investigation for HMRC across many sectors with the recently sharpened weapon – “Known or Should Have Known” or the Kittel principle - becoming a prevalent method for HMRC in tackling supply chain fraud.

Kittel Principle

The “Kittel Principle” utilises the case law initially established in Missing Trader Intra Community (‘MTIC’) Fraud cases. This enables HMRC to disallow input tax recovery by entities in supply chains who purchase labour supplies without undertaking sufficient checks to satisfy themselves that the supplies are genuine and do not involve VAT fraud.

It is important to remember that HMRC are using the Kittel Principle widely and even if you do not consider your business is at risk, wherever HMRC can prove:

1. There is a tax loss in a supply chain (of any sort – goods or services),
2. The tax loss can be linked to the fraudulent evasion of VAT,
3. Your transactions are connected with that tax loss, and
4. You knew or should have known about the fraudulent evasion of VAT

Then HMRC can and will raise an assessment denying any input tax claimed against the supplier who caused the tax losses.

Ablessio Principle

HMRC are utilising a principle known as the “Ablessio principle” to deregister a business on the basis that the company was utilising its VAT registration for fraudulent purposes.

VAT Act 1994

There are two penalty regimes which HMRC can use to apply a penalty (on top of the denied input tax).

These are;

• Schedule 24 of Finance Act 2007
• Section 69C and 69D of VAT Act 1994

The penalty regime which HMRC use is dependent upon when the fraudulent transactions were carried out.

From 16 November 2017, Section 69C of the VAT Act 1994 provided a new penalty for transactions connected with VAT fraud. This was introduced via section 68 of the Finance (No 2) Bill 2017.

The penalty only applies where HMRC establishes that the business knew or should have known that its transactions are connected with VAT fraud.

HMRC can also transfer the company penalty to an office holder, director, or manager, which would make the individual personally liable to a financial penalty.

Contact Aspire

At Aspire, we are able to review your current operation and advise on all aspects of your due diligence process.  This can include drafting policies, undertaking reviews and training sessions.  Email us at enquire@aspirepartnership.co.uk or call 0121 445 6178 for further information.