Crawford Temple, CEO and founder of Professional Passport, says recruiters must now look beyond PAYE compliance.
The introduction of Joint and Several Liability (JSL) legislation has changed the compliance landscape for recruiters, agencies, and labour supply businesses across the UK. While much of the conversation has centred on PAYE obligations and employment tax compliance, recruiters should be cautious about assuming that PAYE compliance alone eliminates risk.
In fact, as HMRC’s scrutiny of labour supply chains intensifies, there are growing signs that some providers have simply shifted the focus of tax planning from employment taxes to VAT. For recruiters, this creates a new and potentially significant area of exposure that cannot be ignored.
Across the market, we are seeing a number of solutions being promoted as fully compliant under the new JSL framework. These arrangements often place heavy emphasis on ensuring PAYE is correctly accounted for, reassuring agencies and end clients that employment tax liabilities have been addressed. However, in many cases, the VAT position receives far less attention. Explanations may be vague, highly technical, or absent altogether.
For recruiters, this should be viewed as a potential red flag.
The push for VAT efficiencies
As JSL legislation increases accountability for PAYE compliance, some operators appear to be redesigning their models around VAT efficiencies instead. The commercial promises often sound attractive but recruiters should remember a simple principle: if a proposition appears to deliver significant financial advantages that cannot easily be explained through genuine commercial efficiencies, it needs to be questioned with caution.
The reality is that resolving PAYE risk does not automatically eliminate VAT risk. HMRC assesses labour supply arrangements holistically, considering the entire structure, commercial substance, contractual relationships, and economic reality of the supply chain. If an arrangement is deemed to have been designed primarily to secure an unintended VAT advantage, HMRC has extensive powers to challenge it.
This is particularly relevant in modern labour supply chains where multiple parties may be involved, including umbrella companies, payroll providers, intermediaries, partnerships, and outsourced service providers. Where the contractual documentation does not align with the actual operating model, HMRC may look beyond the paperwork and challenge the underlying arrangement.
For recruiters, the consequences can be substantial. VAT assessments, penalties, reputational damage, and disruption to client relationships can arise even where PAYE obligations have been satisfied.
Risk becomes more complex
The risk landscape has become even more complex following the Government’s decision to strengthen the Promoters of Tax Avoidance Schemes (POTAS) regime alongside the introduction of JSL measures. These enhanced powers significantly expand HMRC’s ability to investigate and act against arrangements it considers high-risk or avoidance-driven.
Importantly, HMRC’s focus is no longer limited to the original scheme promoter. The revised rules allow HMRC to examine the wider network of businesses connected to an arrangement, including facilitators, introducers, intermediaries, and other participants within the supply chain.
For recruiters, this represents a significant shift. Agencies that recommend, facilitate, introduce, or continue to operate through questionable structures may find themselves subject to increased scrutiny. HMRC can seek access to communications, marketing materials, due diligence records, and other documentation to establish the extent of involvement and awareness.
The potential consequences extend beyond financial penalties. Organisations may face monitoring notices, public disclosure measures, restrictions on future business activities, and, in the most serious cases, criminal investigation.
The introduction of the Corporate Criminal Offence provisions under the Criminal Finances Act adds another layer of responsibility. Under these rules, businesses are expected to maintain reasonable procedures designed to prevent the facilitation of tax evasion within their operations and supply chains.
For recruiters, this means that relying solely on assurances from providers is not enough. Agencies must be able to demonstrate that they have undertaken appropriate due diligence and have assessed the compliance credentials of the businesses they engage with.
Questions recruiters should consider include:
- Can the provider clearly explain how the VAT model operates?
- Does the commercial structure make genuine business sense?
- Are there unusually high financial incentives being offered?
- Is the supply chain transparent and easy to understand?
- Has independent compliance verification been obtained?
- Are governance and audit procedures in place?
Failure to ask these questions may expose recruiters to avoidable risks.
Wider ecosystem under consideration
The direction of travel from HMRC is clear. The focus is no longer simply on recovering unpaid tax after the event. Instead, HMRC is increasingly targeting the wider ecosystem surrounding tax avoidance arrangements, including those who facilitate, support, recommend, or benefit from them.
As a result, recruiters must broaden their compliance focus. Assessing PAYE compliance remains essential, but it should form only one part of a wider due diligence process that considers VAT treatment, supply chain integrity, governance controls, and anti-avoidance risks.
In today’s regulatory environment, agencies that adopt a proactive and robust compliance culture will be far better positioned to protect their businesses, clients, contractors, and reputations. Those that continue to engage with opaque or aggressive arrangements may find themselves exposed to financial liabilities, regulatory scrutiny, supply chain exclusion, and significant reputational damage.
The message for recruiters is simple: when evaluating labour supply solutions, don’t stop at PAYE. Understanding the full compliance picture has never been more important.
