Advanced Payroll, IR35, and Employment Status Audits

Construction payroll combines ordinary PAYE with an unusual concentration of compliance pressure points. IR35 reform from April 2021 made principal contractors responsible for status determinations on contractors. The CITB levy charges on PAYE bills above £80,000. Bear Scotland reset holiday pay calculations for variable-hours workers. The Managed Service Company legislation can flip whole supply chains into PAYE retrospectively. AWR provides parity rights for agency workers. And subsistence and travel allowances need careful structuring to remain tax-free.

This guide covers each compliance area for established construction firms. Each is its own potential exposure, and the combined effect of getting any of them wrong on a workforce of 50+ people is substantial.

IR35 status determinations in construction

The status test under IR35 considers:

1. 1Mutuality of obligation: is the engager required to provide work and the contractor required to do it?
2. 2Substitution: can the contractor send a substitute?
3. 3Control: who decides what is done, when, where, how?
4. 4Equipment: who provides the tools and materials?
5. 5Financial risk: does the contractor bear cost overruns or risk of non-payment for poor work?
6. 6Integration: is the contractor part of the principal's operation or genuinely external?

For construction specifically, much site-based contractor work fails the substitution and control tests and falls inside IR35. Where contractors are inside IR35, they should be paid via PAYE (deemed employment) rather than gross. The administrative burden has pushed many construction firms to convert long-term contractors to direct employees rather than maintain the contractor model.

CEST and tribunal defence

HMRC's Check Employment Status for Tax (CEST) tool produces a status determination. It is HMRC's preferred tool but is increasingly unreliable on edge cases. Tribunal cases (Atholl House, Kickabout Productions, others) have shown CEST determinations failing under judicial scrutiny. For high-value or high-volume contractor populations, specialist review supplements CEST.

The CITB levy

The Construction Industry Training Board (CITB) levies a charge on construction industry employers above defined thresholds. The current structure:

• 0.35% on PAYE-paid wages (where the wage bill exceeds £135,000).
• 1.25% on net CIS-paid subcontractor payments (where the CIS payments exceed £135,000).
• Levy assessments are issued annually based on the prior year's figures.
• Levy is deductible against corporation tax as an ordinary business expense.
• Grant funding is available for training that contributes back, partially offsetting the cost for active training employers.

The CITB returns are an annual compliance task; getting the wage and subcontractor figures right matters because the levy calculation flows from them.

Holiday pay after Bear Scotland and successor cases

The Bear Scotland line of cases (2014 onwards) reset the calculation of holiday pay for variable-hours and piece-rate workers. The principle: holiday pay must reflect normal pay including overtime, commissions, and bonuses, calculated on a rolling 52-week reference period. For construction workers with substantial overtime, piece-rate components, and bonus structures:

1. 1Calculate average weekly pay over the preceding 52 paid weeks (not 52 calendar weeks).
2. 2Include overtime, bonuses, commission, and other variable elements that form normal pay.
3. 3Exclude expenses, occasional discretionary payments, and one-off items.
4. 4Apply the average to holiday taken in the relevant period.

Many construction payrolls still calculate holiday pay on basic-rate-only, which is non-compliant where workers have substantial variable pay. Backdated claims for under-paid holiday can be substantial and fall within 2 years of the claim under current law (Northumbria Police).

The Managed Service Company legislation

MSC legislation (introduced 2007) catches arrangements where a worker is paid through an intermediary but the intermediary is genuinely controlled by an MSC provider rather than the worker. The consequences are severe: all payments to the worker through the chain are recharacterised as PAYE income, with HMRC able to recover unpaid tax from the worker, the intermediary, and (importantly) the MSC provider including its directors personally.

For construction, the risk areas are workforce arrangements involving umbrella companies and certain contractor management services. HMRC has been increasingly active in this area since 2022. Specialist review of any structure involving more than a single layer between the principal and the worker is essential.

Agency Workers Regulations

AWR (in force from 2011) gives agency workers parity with directly-employed workers on day one (basic rights: working time, paid annual leave, equal access to facilities) and after 12 weeks of work (full equal treatment on basic working conditions including pay).

For construction firms using agency-supplied tradesmen:

• Track agency worker assignments to identify those crossing the 12-week threshold.
• Apply equal treatment from week 13: pay, hours, holiday, breaks, paid leave for ante-natal appointments.
• Risk-share with the agency on terms; the legal liability sits primarily with the agency but principal contractors face reputational and contractual exposure.