Purpose, scope and background
Source: gov.uk (2025-01-16)

Provides information on the purpose, scope and background of these guidelines.

Purpose

These guidelines aim to:
- promote the importance of effective labour supply chains (LSCs) assurance
- provide information for businesses to consider when reviewing their LSC assurance practices
- improve customer understanding of LSC risks and potential implications for businesses
They include information about risks and focuses on assurance, covering a framework of principles, including due diligence, alongside other internal practices that larger customers should consider to ‘assure’ the integrity of the supply chain on an ongoing basis.

Businesses higher up in labour supply chains can help disrupt threats and potentially mitigate the risk of future non-compliance through their supply chain assurance practices, which may:
- improve supply chain compliance so the right tax is paid at the right time
- make it harder for fraudsters and criminals to enter the market
- reduce the unfair market advantages from which non-compliant businesses benefit
Practices that prevent, mitigate and reduce opportunities for non-compliance can reduce the potential impact of risks on a business including financial and reputational damage. It could also save businesses time and money compared to involvement with HMRC compliance activity to address risk.

HMRC continues to tackle tax risks in supply chains directly, but we also want to work with our customers to:
- reduce the opportunities available to criminals to exploit labour supply chains
- reduce the risk of economic and social harm in the long-term
- make the labour market a fairer and safer place for businesses and people
Scope

The guidelines focus on assurance practices related to LSC risks, however many of the general principles covered can also be applied to other chains of supply, such as goods and services.

Whilst the guidelines are aimed at larger businesses sitting towards the top of labour supply chains (typically end-users, tier 1 and tier 2 businesses), the general principles apply to businesses anywhere in labour supply chains.

Labour supply chain description and ‘tiers’

A supply chain exists between the end-user or client, at the top of the chain, and the workforce at the bottom of the chain. There can be one or more businesses in between, that make up the chain.

HMRC often refers to ‘tiers’ to describe where a business sits in the supply chain.

The contracting and sub-contracting arrangements between businesses form the layers or ‘tiers’ between the end-user and the workforce.

For example, ‘tiers’ describes a business directly contracted by the end-user at the top of the chain.

If the tier 1 business doesn’t provide the workforce themselves and sub-contracts another business, this creates a second layer or ‘tier 2’ in the chain. If this business engages the workforce directly, the chain stops and would be described as having 2 tiers between the end-user and workforce. If the tier 2 business sub-contracts another business, this would create ‘tier 3’ and so on.

In more complex chains, there can be multiple businesses across each tier and several tiers (or layers) between the end-user at the top and the workforce at the bottom.

How to use these guidelines

You should read these guidelines and consider your businesses’ current labour supply chains and assurance practices.

You should refer to these guidelines to help your business make decisions that relate to your LSCs. They are not designed to create a checklist as risks are dynamic and different factors may apply for different businesses and circumstances. For example, the size of the workforce engaged.

You should read these guidelines alongside the existing guidance for specific tax risks. A summary of further recommended reading material can be found in the Legislation and guidance (https://www.gov.uk/guidance/help-with-labour-supply-chain-assurance-gfc12/legislation-and-guidance) section.

Background

HMRC focuses on LSCs because they present multiple risks and are often targeted by non-compliant individuals and groups seeking to take advantage of the outsourcing of labour.

The extent and impact of non-compliance is particularly heightened in chains that are long, complex and engage a large number of workers. This can also apply to contracts that involve multiple chains operating simultaneously.

For example, tax risks that HMRC finds when labour is engaged through a supply chain include those arising from failure to operate rules correctly such as:
- VAT self-billing
- off-payroll working, employment status and the Construction Industry Scheme (CIS)
- tax-avoidance schemes
- fraud
As well as the tax risks, workers can become victims of exploitation and social harm, where they could be underpaid or lose their National Insurance contributions and their access to benefits. They can also be at risk from modern slavery, human trafficking and other abuses.

LSCs are diverse and critical to the commercial operations of businesses. HMRC recognises that managing them is often a costly and complex activity, particularly for many of our larger customers. We know there are other factors to think about alongside tax risks, including commercial and operational considerations, and potential interest from investors and consumers in an increasingly socially aware economy.

The robust scrutiny and assurance of labour supply chains:
- informs effective decision making about tax compliance and other risks
- helps businesses protect themselves from potential financial and reputational damage
However, HMRC has found that, despite many businesses already undertaking extensive assurance activity when awarding contracts, there is not always a good understanding of the chain between the supplier and the workforce after that, which can present opportunities for non-compliance.