Property & Construction: skills gap due diligence

For some time, there has been growing pressures from all sides for the construction sector. If you factor in union strikes in the rail sector, the rising cost of living, and inflationary pressures all within a post-pandemic and post-Brexit landscape it’s important to consider the workforce volatility within the industry. The recent rollercoaster by the Chancellor(s) with the repeal of the repeal of the off payroll rules, which take precedence over the Construction Industry Scheme guidance, will also result in businesses needing to continue to focus on their labour supply chains and the engagement of workers; are they truly self employed?

The labour shortage challenge

The shortage of labour in the Construction Industry has been a growing challenge and it has become more necessary for businesses to consider alternatives when recruiting. It has been said that the labour woes are a ‘bigger problem’ than the materials shortage, the latter which being considered a short-term issue and the labour shortage very much a long term one. The challenge is to resource, recruit and retain talent and added to this is the fact that a large proportion of the current workforce, who are in the higher age range demographic, are expected to leave the industry over the next decade.

The lack of skilled workers results in a struggle to keep to agreed project deadlines. Businesses are sometimes left with no option other than to hire inexperienced workers and this can then impact on the quality of the work, or the time needed to complete it.

Alternative sources of labour – some considerations

The alternative solutions for the labour shortage often mean engaging workers through agencies and umbrella companies and this can present several risks for businesses.

Where these alternatives are being considered, businesses should secure their supply chains and make sure they hire people correctly. If they want an employee-like worker, then make sure they are on the payroll. If they want services-based provision, then make sure the contractor takes reasonable care and is protected. They must continue to have robust labour supply chain due diligence and documentation reflecting the actual arrangements.

HMRC activity

The supply of labour to the construction industry has meant that HMRC has increased their compliance activity and they have focussed on what they refer to as ‘organised labour fraud’, they have been specifically interested in three areas:

• Labour fraud in construction
• Mini-umbrella company fraud
• Payroll company fraud

HMRC defines labour fraud as a contrived labour supply chain, which involves the abuse of the Construction Industry Scheme to move labour-related VAT (not subject to the Domestic Reverse Charge) and Income Tax liabilities into shell companies that go missing or default owing a debt to HMRC.

The other two ‘frauds’ can also find their way into the construction industry and care needs to be taken if a business engages or uses either of these.

With any of these types of fraud there is always an impact on the workers that affects their employment rights and may impact on their ability to claim benefits in the future. HMRC sees such fraudulent behaviour as stealing the vital revenue that funds UK public services; it is committed to tackling organised labour fraud and supporting the victims.

Actions businesses should take

HMRC recommends that businesses apply the due diligence principles when they receive a supply of labour. This can be broken down into ‘Check, Act and Review’:

• Check – know the risks: legal, financial, tax and the social obligations of suppliers
• Act – conduct robust due diligence on suppliers and act to mitigate or remove risks
• Review – effective due diligence requires continuous monitoring and review

As it becomes more challenging to find the right workers to engage, it therefore becomes more important than ever to ensure that the right checks are made and the systems, processes and evidence are all in place to remove any risks of not following the right procedures.  With the need to spread the net wider to find workers and treat them correctly for tax and National Insurance purposes, it only adds to the burden for businesses to ensure they get it right.

If HMRC finds non-compliance or fraud in your supply chain it is likely to cost you more. HMRC is committed to tackling non-compliance, fraud and illegal working practices in labour supply chains across business sectors so that the government can:

• Fund essential UK services
• Stop modern slavery
• Create a level playing field for those businesses who do comply

Future for off payroll rules?

Besides the risks with labour supply chains, we do not know yet what HMRC might introduce following the repeal (of the repeal) of the proposed changes of the off payroll rules and the status quo we now have in place, where they are deemed to be employed following the introduction of the off payroll rules in 2017 (public sector) and 2021 (private sector). HMRC might still plan to look very closely at this from April 2023 and this may lead to further increase in the number of workers moving to labour suppliers or similar as the uncertainty continues.

How we can help

If you have any questions or concerns in respect of your sub-contractors or the general recruitment and supply of labour or employment status, together with the systems, processes and checks you should have in place, please do contact Steve Ashworth, Head of Employer Solutions.