Why supply chain VAT risk now matters as much as PAYE for recruitment agencies

Recruitment agencies have had good reason to focus on PAYE this year. The new umbrella company joint and several liability rules have made employment-tax failure a direct commercial risk for the agency, or for the end client where no agency sits in the chain.

But PAYE is only one part of the story.

As scrutiny increases, the market risk is starting to shift. Some labour providers may no longer be looking for advantage through employment-tax treatment. They may be looking for it elsewhere. VAT is one of the obvious places that risk can reappear.

That is why a clean PAYE position does not, by itself, prove that a labour supply chain is clean. It proves one part of the arrangement has been checked. It does not prove that the wider commercial model makes sense.

This was the warning raised by Crawford Temple, writing in The Global Recruiter on 18 June 2026. His point was a useful one for recruitment agencies and end-hirers: HMRC is unlikely to look at a labour supply arrangement one tax at a time. It will look at how the arrangement works as a whole.

PAYE checks are not the end of due diligence

The April 2026 umbrella company rules changed the immediate priority for many agencies. If an umbrella company fails to account for PAYE, liability can move up the chain. That has rightly forced agencies to pay much closer attention to how workers are paid, how deductions are made and whether the provider’s PAYE position is credible.

But the danger is that PAYE becomes the only question asked.

A supplier can appear to have dealt with PAYE properly while still relying on a VAT treatment that has not been fully explained. The commercial offer may still look unusually attractive. The margin may still seem difficult to justify. The paperwork may still avoid the harder question of where the financial advantage is really coming from.

In that situation, the risk has not necessarily gone away. It may simply have moved.

Why VAT now matters in labour supply chains

Labour supply chains are rarely neat. A single worker placement can involve an agency, an umbrella company, payroll support, outsourced administration, introducers, service companies and other intermediaries. The visible contract may be only part of the picture.

That matters because VAT risk can sit below the level the agency sees day to day. It may sit in how services are described, how charges are structured, how parties invoice each other, or how a provider explains the value it is supposedly adding.

For an agency or end-hirer, the practical question is not simply: “Has PAYE been dealt with?”

It is: “Does the whole arrangement make commercial and tax sense?”

If the answer depends on a supplier’s reassurance rather than evidence, the agency may be left exposed when the arrangement is reviewed later.

HMRC will look beyond the paperwork

HMRC is not limited to the labels used in contracts. It can look at the substance of the arrangement: who is doing what, where the money flows, what commercial purpose each party serves and whether the explanation matches reality.

That is where a narrow PAYE check can fall short. It may answer one important question, but leave several others untouched.

Why is this supplier cheaper?

Who else is involved in delivering the service?

What VAT treatment is being applied?

Has the provider explained the commercial basis for its model?

Is there evidence that the explanation has been reviewed, challenged and monitored?

These are not academic questions. They are the questions an agency may need to answer if HMRC later takes a wider interest in the arrangement.

The Criminal Finances Act makes evidence essential

The Criminal Finances Act 2017 added a further reason for agencies to take this seriously. The corporate offences for failing to prevent the facilitation of tax evasion are not limited to what happens inside the agency’s own payroll team.

The risk can involve people and organisations acting for or on behalf of the business, including agents, contractors and intermediaries. In a labour supply chain, that matters.

The defence is not that the agency trusted the supplier. It is that reasonable prevention procedures were in place. In practice, that means a clear risk assessment, proportionate due diligence, proper records, communication, training where needed, and ongoing monitoring.

Put more simply: the agency needs to be able to show what it asked, what it checked, what evidence it relied on, and how it kept that position under review.

What agencies should be asking now

For recruitment agencies and end-hirers, the immediate lesson is not to replace PAYE checks with VAT checks. It is to stop treating PAYE as if it answers the whole supply-chain question.

A stronger due diligence process should look across the arrangement. It should check VAT registration. It should understand the supplier’s commercial model. It should identify who else sits in the chain. It should challenge any unexplained financial advantage. And it should record the evidence behind each decision.

The important point is continuity. A supplier that looked acceptable at onboarding can change. Directors can change. Ownership can change. Credit risk can change. The underlying model can change. If the agency is not monitoring those movements, its evidence file can become stale very quickly.

How OPRaaS helps

The OPRaaS Virtual Compliance Director is designed for that wider assurance problem.

It helps recruitment agencies, end-hirers and public sector buyers move beyond one-off supplier checks and build a continuous Labour Supply Chain Assurance process. Due diligence, VAT checks, governance records, Companies House monitoring, credit-risk changes and audit evidence are brought into one structured system.

That matters because HMRC scrutiny is rarely answered by saying a supplier looked credible at the time. It is answered by showing what was checked, when it was checked, who reviewed it and what changed afterwards.

A clean PAYE position is not the same as a clean labour supply chain.

The board-level question

For recruitment agency boards and end-hirers, the question is now straightforward.

Can you evidence that the supplier arrangement makes sense beyond PAYE?

If the answer is no, VAT risk may already be sitting somewhere in the chain. The agencies that deal with that now, rather than waiting for a challenge, will be in a stronger position when HMRC asks how the whole arrangement was assessed.

Compliance is your asset. Evidenced daily.

Read next

“Own your compliance as an asset.”

Drawing on commentary by Crawford Temple in The Global Recruiter, published on 18 June 2026; HMRC guidance on the corporate offences for failing to prevent the criminal facilitation of tax evasion under the Criminal Finances Act 2017; the umbrella company joint and several liability rules introduced by Finance Act 2026; and the OPRaaS LSCA Self-Certification Course Module 6.