By Neal Groves, Tax Partner, Beavis Morgan
HMRC has stepped up its focus on supply chain fraud, and hospitality businesses are firmly in the spotlight. Alongside construction and labour supply, HMRC has identified hospitality as a high-risk sector due to its heavy reliance on subcontracted labour, high staff turnover, and complex procurement arrangements.
This means that even if your business is not directly committing fraud, you can still be held responsible – with serious financial, legal, and reputational consequences – if you cannot demonstrate that you have taken “reasonable care” in managing your supply chains.
Why hospitality is at risk
- Labour supply chains: Casual, agency, and subcontracted workers are common in the sector, but HMRC is increasingly identifying cases where PAYE and NIC are not properly accounted for.
- Cash-based transactions: Parts of the industry still rely heavily on cash, increasing the risk of unrecorded payments or “off-the-books” arrangements.
- Complex supplier networks: From food and drink to cleaning, security, and facilities management, hospitality businesses often work with multiple suppliers. Each one represents a potential point of exposure.
What HMRC is looking for
Hospitality operators could face scrutiny in the following areas:
- VAT fraud – fraudulent suppliers charging VAT but disappearing before paying it to HMRC.
- Labour fraud – employment taxes going unpaid within staffing agencies or subcontractors.
- Fake suppliers – bogus companies impersonating genuine providers to divert funds.
Under established case law, if HMRC believes you “knew or should have known” about fraud in your supply chain, they can deny your VAT reclaims and impose penalties, regardless of your direct involvement.
What you should do now
Hospitality businesses must take proactive steps to reduce their exposure:
- Conduct thorough due diligence on all suppliers, especially agencies providing staff.
- Review and verify all invoices and contracts carefully.
- Keep transparent records that show goods or services were genuinely delivered.
- Ensure employment taxes are being correctly handled by all labour providers.
- Deliver staff training so teams can spot red flags.
- Review your contracts and internal controls, making sure audit rights and compliance obligations are built in.
Capcon’s perspective
At Capcon, we regularly help hospitality businesses strengthen their risk management, from high-level employee screening to compliance audits and fraud prevention training. With HMRC’s focus only intensifying, taking action now is critical.
Ken Dulieu, Chairman of Capcon, comments:
“Hospitality is under the microscope like never before. HMRC has made it clear that businesses can no longer plead ignorance when fraud is found in their supply chains. Taking shortcuts is a false economy – the financial, reputational, and even criminal consequences can be devastating. Robust due diligence and ongoing monitoring are no longer optional; they are essential.”
How we can help
Capcon and Beavis Morgan work together with hospitality operators across the UK to:
- Carry out supply chain risk assessments.
- Provide high-level employee and supplier screening.
- Support with HMRC enquiries and disputes.
- Design and implement fraud prevention and compliance frameworks tailored to hospitality.
- Deliver training and governance programmes that protect businesses and leadership teams.
Final thought
Supply chain fraud is not just a tax issue – it is a business risk that goes to the heart of trust, compliance, and reputation. For hospitality operators, the stakes are high. By acting now, you can safeguard your business, your people, and your future.
To discuss how Capcon and Beavis Morgan can help protect your hospitality business from supply chain fraud, contact us today.
