How to comply with HMRC’s new labour supply chain guidance in 2025

As labour supply chains grow more complex—from temporary staff, recruitment agencies, security services, and outsourced operations – so do the risks. Not just in workforce quality, but also in tax compliance and payroll accuracy. To address these issues, HMRC is stepping up its efforts to ensure businesses have strong labour supply chain controls in place.

The rationale behind the changes

HMRC’s latest initiative targets growing concerns over non-compliance and tax loss in complex labour arrangements. Businesses operating within extended supply chains can inadvertently—or deliberately—find themselves associated with practices that undermine tax integrity. HMRC has begun issuing nudge letters in sectors like private security, urging firms to review PAYE and national insurance compliance. These changes reflect HMRC’s view that weak assurance practices can lead to costly penalties and reputational damage through links to non-compliant networks. HMRC believes that complex labour chains may be exploited to avoid tax, social security, and employment law, harming fair competition.

A shift in HMRC’s approach

Historically, measures like the Modern Slavery Act 2015 and various voluntary disclosure schemes have been used to improve supply chain transparency. However, as supply chains have grown more convoluted, HMRC now contends that these approaches are insufficient. The department’s new guidance outlines principles and actions to help organisations manage tax and labour supply chain compliance risks. This framework sets minimum compliance standards businesses must meet to reduce risks in their labour supply chains.

The updated guidelines not only outline what constitutes robust due diligence but also provide concrete examples of best practices. These include comprehensive supplier audits, enhanced contractual monitoring, and rigorous documentation of all payroll-related activities. By setting expectations for reasonable care, HMRC highlights the risks of non-compliance. Breaches may result in significant penalties later.

Practical implications for businesses

For many businesses, especially those relying on temporary or outsourced labour, the updated HMRC guidance marks a significant shift. It requires organisations to take an active role in monitoring every link in their labour supply chain—from the primary supplier to sub-contractors. Companies must assess suppliers’ financial integrity, payroll practices, and how their own systems compare to current compliance expectations. Such a holistic approach can be challenging, particularly for smaller firms that may not have large compliance teams.

However, this proactive stance from HMRC also provides an opportunity. By adhering to the guidance, businesses can reduce the risk of unexpected tax liabilities and avoid reputational damage. Enhanced assurance practices lead to greater transparency and build consumer trust—a valuable asset in today’s market. Organisations investing in technology to track and verify their supply chain data will likely find they have a competitive advantage over less-prepared competitors.

Bridging the compliance gap

One of the key challenges identified by HMRC is the disparity between the compliance capabilities of large, multinational companies and smaller firms. Multinationals often have the resources to implement sophisticated monitoring systems and conduct regular audits. In contrast, smaller enterprises may struggle with the administrative burden required by these new standards. HMRC’s guidelines acknowledge this gap by offering practical recommendations that are scalable to the size and complexity of the business in question.

The agency is encouraging all organisations to measure their current processes against the new compliance framework. This self-assessment not only helps identify vulnerabilities but also provides a roadmap for making necessary adjustments. Businesses are advised to document each step of their labour supply chain—from recruitment to payroll. This helps demonstrate due diligence if HMRC requests evidence.

Looking to the future

HMRC’s revamped approach to labour supply chain assurance is just the beginning of what is expected to be a broader regulatory shift. As global supply chains continue to evolve, further refinements in legislation and enforcement are anticipated. Future measures may include tougher penalties and more support for victims, encouraging companies to uphold higher operational standards.

Yet, it is important to remember that these changes are not solely about enforcement. They represent a commitment to cleaner, fairer business practices where compliance and ethical responsibility go hand in hand. The HMRC move is a clear signal to the market. In today’s interconnected economy, the integrity of every link within your labour supply chain is critical, and there is no room for laxity.

Conclusion

The recent changes to labour supply chain assurance represent a new era in HMRC’s enforcement strategy. By demanding higher standards of compliance and due diligence, HMRC is tackling systemic risks head-on. While these measures may pose challenges—especially for smaller firms—they ultimately serve to protect both the business and the broader economy from the adverse impacts of non-compliance. In this environment, transparency and proactive risk management are not just regulatory requirements; they are essential components of long-term business success. As HMRC continues to refine its expectations and enforce these standards, companies that adapt swiftly will not only avoid penalties but will also position themselves as trusted leaders in ethical business practice.

Businesses that receive a ‘nudge’ letter should take appropriate steps to confirm whether their labour supply chain compliance is in line with HMRC’s expectations. Security services providers who have yet to receive a letter should assume they are likely to receive one in due course and also consider their compliance position.

This change effectively sets minimum compliance standards that HMRC expect to see. Organisations should measure their current processes and controls against the new guidance, take necessary steps to strengthen their approach, and where relevant disclose and correct any compliance errors identified.

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We can support you with best practices for risk controls and help build systems that withstand HMRC scrutiny.

Please contact Steve Ashworth, Joe Rowsell or Tamara Beach.