Labour supply chain due diligence – have you got it covered?

Labour supply chain risk

Outsourcing contingent labour might be convenient, but it can carry hidden PAYE, NIC and employment law risks.


Labour supply chain risk

As employers strive to improve flexibility for employees, we’re likely to see increasing reliance on contingent or temporary workers and consultants to plug skills and resource gaps. 

These individuals may be engaged directly, via intermediaries such as agencies or umbrella companies, or form part of your supply chain via an outsourced service arrangement or a consultancy contract.

Changes to the ‘IR35’ rules that came into force on 6 April 2021 and the Supreme Court Uber judgement earlier this year provide stark reminders that the burden on engagers is increasing, and personal services paid for outside of payroll face increased scrutiny.

Regardless of the engagement model, engagers of off-payroll workers must ensure individuals who provide personal services are assigned the right employment status (there are three categories: self-employed, worker or employed) to ensure:

  • They’re provided with the correct employment rights; and
  • Where necessary tax and NIC is calculated and withheld correctly.

Whether it’s a challenge from HMRC or through the employment tribunals, the cost and reputational impact of getting employment status wrong can be severe. 

Determining employment status is a complex process that requires the engager to review the terms and conditions and working practises of the individual to build up a picture of the overall engagement. 

This complexity may tempt end users to outsource the provision of contingent labour to a 3rd party employment intermediary (e.g. an agency or umbrella company). 

As we’ve seen in recent press reports and HMRC’s alert on mini umbrella structures, it isn’t possible to outsource risk entirely. 

In some cases, removing direct oversight of your labour supply chain may increase risk as you lose visibility of the terms and conditions, working practises, employment rights and tax withholding.  

What should organisations do?

Most end users who engage agencies have a preferred supplier that’s subject to detailed due diligence to test and document the commercial and legal relationship with the agency, and regular audits are performed to confirm all aspects of compliance. 

In addition to your main preferred supplier, where there’s an opportunity to sub-contract the supply of labour to other agencies and umbrellas, you may need to undertake a further detailed due diligence exercise.  The high-level checklist below can help you to understand the risk profile of the sub-contracted agency/umbrella: 

  • Identify all routes through which contingent labour can be engaged and implement robust and proportionate controls across the end-to-end process;
  • Identify key points in the process where risk may arise and strengthen controls in these areas;
  • Understand the engagement model between the agency or umbrella and the individual to ensure there are no complexities that seek to deny entitlement to employment rights, or e.g. managed service companies that might cause the transfer of debt for unpaid tax and NIC to you (recently we’ve seen new schemes emerge such as the ‘CIS model’, and seen HMRC’s Fraud Investigation Service take action against mini umbrella arrangements – engagers must challenge providers to ensure there are no arrangements in place which attempt to circumvent the UK employment and tax rules);
  • Is the agency or its directors based offshore or are any of the individuals provided working under contracts with an offshore party?
  • What commercial and legal due diligence is undertaken in relation to the other agencies and umbrellas in the supply chain?
  • Confirm the extent to which individuals supplied will be subject to supervision, direction or control and confirm with the agency whether the Agency rules at s44 ITEPA 2003 apply (in this case, the agency will need to accept responsibility for complying with those rules and ensuring PAYE and NIC is accounted for on payments to the individuals);
  • Confirm how workers are being paid and who is responsible for making payments to ensure this isn’t in the form of loans, expenses, advances etc so that some of the individuals’ pay is intended to fall outside of PAYE and NIC; and
  • Confirm how the payer is satisfied that NMW is paid and confirm the holiday pay and pension arrangements including a process for regularly reviewing payslips to audit the calculations.

How KPMG can help

KPMG’s employment solutions and employment legal team has worked with many organisations to ensure the robustness of their labour supply chain and mitigate employment status risks, including:

  • Setting up processes and controls to check employment status;
  • Drafting contracts or clauses with agencies, intermediaries, suppliers and workers to manage risk;
  • Identifying contracting routes within the organisation and ensuring appropriate controls across buying channels to mitigate compliance issues;
  • Reviewing contracts for service or labour provision;
  • Our team includes ex HMRC officers who can support you to develop a governance framework so that policies are applied and controls monitored to support Senior Accounting Officer reporting.

If you’d like to talk through how KPMG can support your organisation’s labour supply chain due diligence, get in touch with Caroline Laffey, Eloise Knapton, Donna Sharp, or your usual KPMG contact. You can also email

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