Receiving notice from HMRC about an employment status review can feel stressful—particularly in the construction industry, where the use of subcontractors is common. HMRC regularly checks employment status to ensure compliance with IR35, CIS, and employment tax regulations.
But don’t panic. If HMRC contacts you regarding employment status, there are clear, practical steps you can take to manage the review effectively, minimise disruption, and avoid unnecessary penalties.
In this guide, we’ll outline exactly what you need to do if HMRC reviews your employment status.
🔍 Why Does HMRC Review Employment Status in Construction?
HMRC regularly checks employment status to determine if workers are correctly classified as subcontractors or if they should be treated as employees, impacting:
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Income Tax and National Insurance contributions
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Compliance with IR35 rules
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Liability for PAYE tax and penalties
Incorrectly classifying employees as subcontractors (self-employed) can result in significant back-taxes, fines, and penalties.
✅ What Should You Do if HMRC Contacts You About Employment Status?
Follow these practical, clear steps:
Step 1: Don’t Ignore the Letter—Respond Promptly
Ignoring HMRC’s request can lead to escalated enquiries or penalties.
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Immediately acknowledge receipt of HMRC’s letter.
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Clearly confirm you’ll respond fully within the requested timescale.
Step 2: Understand Exactly What HMRC is Asking For
HMRC typically requests specific information around:
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Contractual agreements with subcontractors or workers
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How, when, and where work is carried out
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Financial arrangements (payment terms, rates)
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Levels of supervision, direction, or control
Read HMRC’s letter carefully and note exactly what they require.
Step 3: Gather Clear Evidence to Support Your Position
The clearer your evidence, the easier the review process will be. Gather:
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Written contracts clearly showing subcontractor status (terms of engagement, payment arrangements, risk and insurance responsibilities).
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Invoices clearly separating labour and materials.
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Payment records demonstrating regular and accurate CIS deductions.
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Correspondence or emails clearly demonstrating subcontractors’ independence (how work is assigned, controlled, and invoiced).
Step 4: Review Employment Status Criteria
Clearly understand what HMRC uses to determine employment status:
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Control: Can subcontractors decide how, when, and where they work?
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Financial risk: Do subcontractors carry business risk (tools, insurance, losses)?
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Substitution: Can subcontractors send another qualified person to do their work?
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Mutuality of obligation: Are both sides free to terminate engagements without ongoing obligations?
Clearly matching your practices against these criteria helps your case.
Step 5: Seek Professional Advice Immediately
Employment reviews are complex. Seeking specialist advice early significantly improves outcomes:
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Engage an accountant or advisor specialising in IR35, CIS, and employment status.
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Have them review your response clearly before submission.
Step 6: Respond to HMRC Clearly and Accurately
Provide HMRC with a clear, accurate response within their deadline. Clearly explain your position and supply detailed supporting evidence.
Step 7: Prepare for Possible Outcomes
If HMRC decides workers are incorrectly classified, you may face:
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Backdated PAYE/NIC liabilities.
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Penalties and interest on unpaid tax.
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Changes in employment practices going forward.
Be ready to negotiate and clearly discuss solutions to minimise disruption and costs.
🚫 Common Mistakes to Avoid
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Ignoring HMRC’s letters or deadlines.
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Providing incomplete or unclear documentation.
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Being unprepared or unaware of employment status criteria.
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Attempting to handle complex enquiries without professional advice.
🛠️ Tools to Help Prepare and Stay Compliant
Use clear, easy-to-use software to manage compliance effectively:
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Xero / QuickBooks: For accurate CIS deductions and records.
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BrightPay / SubbieHub: Specialist tools for CIS and employment status management.
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Employment Status Tools (CEST tool by HMRC): Quickly check worker classification.
👷♂️ Real-Life Example: Successful HMRC Employment Status Review
We recently supported a construction firm through an HMRC employment enquiry. HMRC initially suspected workers were wrongly classified as subcontractors.
We clearly demonstrated with documentation:
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Workers’ genuine independence.
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Proper CIS compliance.
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Clear contracts and financial records.
The outcome: HMRC agreed with our client’s position, with no penalties or changes required.
📞 Need Expert Help Managing an HMRC Employment Status Review?
At Thomas Emlyn Ltd, we specialise in helping construction businesses navigate HMRC reviews clearly and effectively.
We’ll help you:
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Respond accurately and clearly to HMRC.
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Prepare robust documentation.
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Avoid penalties and manage ongoing compliance confidently.
📞 Book a discovery call—and manage your HMRC review confidently.
📌 Final Thoughts
An HMRC employment review isn’t necessarily a problem if you respond clearly, promptly, and professionally. Ensure your documentation is clear, accurate, and ready, and get expert support early to achieve the best outcome.
