Recruitment agencies placing workers into construction roles sit at the intersection of two separate sets of HMRC rules, and getting it wrong in either direction can be expensive. Some payments should go through PAYE under the agency rules. Others fall under the Construction Industry Scheme (CIS). The two systems are not interchangeable, and which one applies depends on the precise structure of the contracts involved — not simply on whether the work happens on a building site. As a chartered accountant recruitment agencies and construction firms turn to us for exactly this kind of overlap, this is one of the questions we’re asked most often.
Two Different Starting Points
The agency rules and CIS were designed to deal with different problems, and that’s exactly why confusion happens. The agency rules exist to stop genuinely employed-style work being disguised as self-employment, and where they apply, the agency must deduct PAYE tax and Class 1 National Insurance, just as an employer would. CIS, by contrast, exists to manage tax on payments to genuinely self-employed subcontractors working in construction. An agency can find itself dealing with both, sometimes for workers doing near-identical jobs, depending on how each placement is structured.
Where the Two Rules Actually Collide
The key question is who has the contract with whom. If a worker is supplied to a contractor by an agency and works under a contract with that agency, the agency rules normally apply, and PAYE should be operated on payments to the worker — CIS does not come into play. However, if the agency itself is acting as a subcontractor, supplying labour under what amounts to a construction contract with the contractor, the contractor may need to apply CIS deductions to payments made to the agency. A third scenario exists too: where a worker is merely introduced by the agency but contracts directly with the contractor, the agency isn’t involved in the construction contract at all, and CIS, if anything, applies between the contractor and the worker. If your agency works across several of these structures at once, it’s worth getting them individually reviewed — contact us and we can talk through your specific placements.
Why This Matters More in 2026
HMRC has sharpened its focus on this exact grey area. From April 2026, reforms affecting joint and several liability mean recruitment agencies and end clients can face greater exposure where PAYE and NIC haven’t been correctly applied, particularly where umbrella companies or self-employed intermediaries sit in the chain. Alongside this, CIS itself has tightened: contractors must now file monthly nil returns even when no subcontractor payments have been made, and HMRC’s anti-fraud powers allow it to pursue businesses further down a supply chain where it considers they knew, or should have known, about non-compliance elsewhere in that chain.
The Cost of Getting It Wrong
Misapplying either system isn’t a minor administrative slip. Apply PAYE where CIS should have applied, or vice versa, and HMRC can reassess years of payments, with interest and penalties attached. Agencies operating across both employed and self-employed placements in construction need contracts and processes that make the distinction explicit for every worker, not just a general policy applied across the board. Our financial advisors team in Essex regularly helps agencies stress-test exactly this kind of process before HMRC does it for them.
Getting the Structure Right From the Start
Because the correct treatment depends entirely on contract structure rather than the type of work being done, this is an area where it pays to get advice before placements begin, not after HMRC asks questions. We’ve worked with recruitment and construction clients across Essex for years on precisely this kind of compliance question — you can find out more about Beckett Taylor and how we approach it. If you’re unsure whether your current arrangements would stand up to scrutiny, it’s worth a conversation sooner rather than later.