HMRC has recently shifted their goalposts on supply chain risk. And this could have a radical impact on how you work and, crucially, how you document that work.
It’s no longer just a matter of reporting payments. It’s about proving that you have actively verified everyone in your supply chain.
If you think your compliance obligations still end with filing a monthly return, you’re at risk of missing the bigger picture.
The “Knew or Should Have Known” Standard
HMRC’s new anti-fraud powers mean that if a subcontractor in your chain disappears or defaults on their taxes, HMRC will look at your records to see if you “knew or should have known” fraud was taking place.
If your files are thin, or if you’ve relied on a verbal agreement rather than documented proof, you could be held liable for their lost tax.
So what does this mean in reality, for you? Basically you are now being expected to treat your subcontractor onboarding process with the same care and rigour you would when carrying out any other mission-critical process.
What Should You Be Documenting?
And straightaway here’s the annoying thing. HMRC hasn’t introduced one single new form for you to fill out every month. Instead they’ve made it clear that they expect a robust, auditable trail for every subcontractor you engage.
To protect your business, your subcontractor files should now consistently include specific evidence.
To give you some idea of what this means in practice, based on recent HMRC requests here are some of the types of documents they are specifically looking for you to send to prove legitimacy:
- Proof of Business Activity: HMRC is asking to see recent invoices sent to other contractors, which helps prove the subcontractor is a genuine business trading with multiple clients, rather than a disguised employee.
- Proof of Financial Transactions: These are documents such as redacted bank statements showing that the subcontractor is paying their own legitimate business expenses. These could include commercial insurance, tool insurance or vehicle hire.
- Verification of Physical Presence: You should hold records of site-specific documentation, such as signed health and safety induction logs or site access gate passes. These will allow you to verify that the subcontractor was physically present at the job.
- Formal Communication: HMRC may ask for copies of email or message chains regarding job scheduling. These can help to confirm a professional, arm’s-length business relationship rather than a direct-employment setup.
- Business Legitimacy: You should perform and record checks to confirm the business you’re dealing with is a legitimate entity. Start by verifying that their Companies House details match the information they’re using with you.
Why This Matters for Your Cash Flow
If in its wisdom HMRC decides your due diligence wasn’t up to scratch, the penalties can be pretty severe.
For instance, they can immediately cancel your Gross Payment Status (GPS), bar you from reapplying for five years, and transfer the tax liability of the missing subcontractor directly to you.
Your Action Plan
As always HardHats is here to see you right. We recommend you start doing the following pronto:
- Conduct an Audit: Spend an afternoon reviewing your current subcontractor files. If you find gaps, address them immediately before your next contract renewal.
- Standardise the Onboarding: Create a mandatory checklist for site managers or admin staff to ensure no subcontractor is paid until these specific documents are on file.
- Use Official Sources: For the definitive list of what constitutes “reasonable” due diligence, refer to the GOV.UK guidance on the Construction Industry Scheme.
Compliance isn’t just about filing on time any more. It’s about building a paper shield that proves you run a clean, professional operation. Don’t let a lack of paperwork put your business at risk for someone else’s stupidity.
Anything bugging you? Give us a call for chat and we’ll make sure you’re it’s only working a site in the summer heat that’s getting you sweating.