How to Ensure Labour Supply Compliance Doesn’t Hinder Your Growth Plans

4 January 2023

Andrew Webster - MD, Workwell Enterprise

Andrew Webster

MD, Workwell Enterprise

The recruitment sector in the UK has seen a boom in recent years, further fuelled by the pandemic-inspired “great resignation”.

According to UKRecruiter, 6000 new recruitment businesses were registered in the UK in 2021 alone. With minimal barriers to entry and a buoyant employment market, it’s easy to see how this entrepreneurial sector appeals to people looking to set up on their own.

In addition to this new growth, the sector has also experienced a high volume of M&A activity. In its 2022 Mid-year Recruitment Market snapshot, BDO UK reported that “Coming into 2022, UK deal activity in the recruitment market had reached a 10-year high and there was a confident sentiment amongst recruitment leaders that growth would continue”.

Based on such results, it’s reasonable to assume that many recruitment business owners, whether one-person firms or SMEs, will have aspirations to build and acquire or build and sell on.

But what impact could compliance, or a lack of it, have on these aspirations?

Regulation and compliance in the temporary labour sector

Compliance has been the buzzword within the temporary labour sector for a while now.

With legislation constantly being updated and a government focus on the sector, the need for labour supply chain compliance has rarely been more pronounced. Most recently, we’ve seen the rollercoaster ride that was the off-payroll working repeal and reversal, and we’ve also heard HMRC’s announcements of enormous fines for public sector non-compliance.

HMRC have even gone as far as to publish guidance on how to assure your labour supply chain. Subsequently, the trend for scrutiny within the recruitment sector looks likely to continue and, quite probably, intensify.

Two significant pieces of legislation affecting the temporary labour supply chain are the Criminal Finances Act (2017) and the Off-Payroll Working Reforms, commonly referred to as IR35.

Criminal Finances Act 2017 – risk and compliance

The Criminal Finances Act (2017) allows law enforcement agencies to recover the proceeds of tax evasion and other criminal financial activities. The aim of the legislation states that “relevant bodies should be criminally liable where they fail to prevent those who act for, or on their behalf from criminally facilitating tax evasion.”

In other words, end clients and agencies need to be aware and confident of the practices conducted by their suppliers to ensure that they are not associated with any tax evasion activities.

With a significant number of tax evasion schemes already identified and the threat of unlimited fines, the Criminal Finances Act (2017) poses a real threat to recruitment agencies and end clients that don’t take labour supply chain compliance seriously.

IR35 – risk and compliance

The Off-Payroll Working reforms, introduced into the private sector in April 2021, are the latest version of the UK tax legislation commonly referred to as IR35. Affecting recruitment businesses and companies that supply and engage personal service company (PSC) contractors, the changes introduced in April 2021 turned the legislation on its head.

Responsibility for the declaration of employment status was moved from contractor to end client, and the responsibility for tax deductions from contractor to payee (agency or end client).

With the threat of transferring outstanding debts for unpaid taxes down the supply chain, the financial risk and need for strong compliance were dramatically increased for both agency and the end client.

Other labour supply chain risks and regulations

With many other pieces of legislation also impacting the temporary labour market and supply chain, it’s no wonder that compliance has become such a focal point. The risks posed to agencies and end clients involved in supplying and utilising temporary labour have become significant.

Unpaid taxes, fines and penalties can be crippling for any business but beyond these, what other implications might non-compliance have?

The impact of compliance on business aspirations

For those businesses looking to merge, acquire or sell on, increased scrutiny and compliance can often be perceived as onerous, time-consuming and restricting entrepreneurial progress.

However, if viewed from a different perspective, robust and effective compliance, especially considering the current focus, should represent an opportunity to enhance the reputation and value of a recruitment business.

Not only should good compliance give your clients confidence and increase your credibility as a supplier, but it will also undoubtedly make your business a more attractive proposition should you wish to merge or sell it. Good compliance is also likely to improve the perceived value of your business.

Poor compliance, on the other hand, including a lack of supply chain due diligence and management, is most likely to indicate poor management and could seriously influence the desirability and value of your business in the eyes of buyers, investors or partners.

Are you concerned about the compliance of your temporary labour supply chain?

Demonstrating supply chain due diligence and compliance will mitigate most of your immediate supply chain risk. As importantly, it will also significantly contribute to your business’s credibility, attractiveness, and value should you decide to merge, acquire or sell.

Addressing any compliance concerns now will contribute to your peace of mind and a more sustainable business for the future.

Speak directly with Andy Webster, Managing Director of Workwell Enterprise, to find out more about how we can help.

07827 810851

[email protected]

 

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