PAYE or CIS: which applies when an agency supplies workers to a construction site?

News · Agencies and end-hirers · OPRaaS Platform

When a recruitment agency supplies a worker to a construction site, someone has to decide whether the worker is paid under PAYE or CIS. PAYE is how an employer takes income tax and National Insurance from wages. The Construction Industry Scheme (CIS) is how a contractor takes deductions from payments to self-employed subcontractors for construction work.

According to HMRC’s guidance, CIS deductions are 20 per cent for a registered subcontractor and 30 per cent for one that is not registered. Which scheme applies to agency labour is not a matter of preference, or of what the worker asks for. Since 6 April 2014, the agency legislation in section 44 of the Income Tax (Earnings and Pensions) Act 2003 has decided it, and the test turns on how the worker is managed on site.

Getting it wrong has a cost on both sides of the chain. An agency that pays under CIS when PAYE was due can be pursued for the tax and National Insurance that should have been deducted. A contractor that treats its payments to an agency as outside CIS can be left with a deduction shortfall.

When the agency rules mean PAYE applies

HMRC’s Employment Status Manual at ESM2034 sets out four conditions. The worker personally provides the services. There is a contract between the client and someone other than the worker, such as an agency. The worker is subject to, or to a right of, supervision, direction or control by any person. And the pay is not already employment income.

Where all four are met, the worker is treated as employed by the agency for tax, and HMRC’s manual at ESM2031 says PAYE must be operated. The words “by any person” matter on a construction site. On OPRaaS’s reading, a site manager or a main contractor’s supervisor directing how the work is done can bring the worker within the rules, even if no one from the agency is ever on site.

The rules do not apply where the worker is genuinely free of supervision, direction or control. HMRC’s own example at ESM2060 is a joiner placed by an employment business to build and hang a door, told from the outset that nobody would direct how he did it. HMRC concludes the agency legislation does not apply. HMRC’s manual at ESM2042 also expects the agency to hold satisfactory evidence that this is the case.

Where CIS still applies in an agency chain

CIS does not disappear because the worker is on PAYE. HMRC’s Construction Industry Scheme Reform Manual at CISR13050 says that where an agency supplies a worker who carries out construction work under the agency’s contract, the agency is treated as the subcontractor. The contractor applies CIS when it pays the agency, and the agency should register for CIS like any other business.

Where the agency only introduced the worker, and the worker contracts directly with the contractor, CIS does not apply to the agency, because there is no construction contract between them. Where the off-payroll working rules apply instead, HMRC’s manual at ESM10004A says CIS does not need to be considered.

So the answer to “PAYE or CIS?” can be both, at different links in the chain. PAYE can apply between the agency and the worker, while CIS applies to what the contractor pays the agency. Each link needs its own decision, and its own record.

What the Harbron Recruit case shows about PAYE or CIS

The interaction is easy to get wrong. In Harbron Recruit Ltd v HMRC [2025] UKFTT 23 (TC), a business supplying construction labour had treated its payments to the agencies supplying its workers as outside CIS, because the agency rules treated those workers as employees. HMRC sought the CIS deductions it said should have been made.

The First-tier Tribunal described the interaction between the two regimes as technically complex. It treated the company’s view as a genuine mistake, found it had taken reasonable care, and reduced the £354,162 still in dispute to nil, according to the published decision. The tribunal accepted that HMRC were technically correct that the payments fell within CIS, even though the workers were deemed employees. The company won only because it could show reasonable care, which is a records question.

PAYE or CIS is decided at each link in the chain, and each decision needs a record of why.

Why the PAYE or CIS decision carries more weight since April 2026

Since 6 April 2026, CIS has carried new fraud measures introduced by Finance Act 2026. According to HMRC, where a business knew or should have known that a payment was connected with fraudulent evasion of tax, it can lose gross payment status with immediate effect, be made liable for an amount based on the payment and face a penalty.

Those rules in section 62A of Finance Act 2004 can also reach deliberate PAYE failures. They apply where a person makes a payment under a construction contract and, before paying, knew or should have known that a connected party, meaning another party to that contract or to another construction contract for the same operations, had deliberately failed to deduct or pay CIS or PAYE amounts.

On OPRaaS’s reading, agency and umbrella arrangements in a construction chain can fall within that reach where they are party to such a contract.

Umbrella companies add a further layer. Finance Act 2026 inserted Chapter 11 into Part 2 of ITEPA 2003, with effect for payments made on or after 6 April 2026. It makes the agency that contracts with the end client jointly and severally liable with the umbrella company for PAYE the umbrella fails to pay, or the end client where there is no such agency. This is the umbrella-market regime, distinct from older PAYE debt transfer powers.

What a defensible PAYE or CIS record contains

For recruitment agencies supplying construction labour, and the contractors and end-hirers using it, a record that stands up usually holds four things:

1. A status decision for each role. Who on site directs the work, how, and the evidence that the worker is, or is not, subject to supervision, direction or control. It is reviewed when the role changes.
2. A contract map. Which business contracts with which, so it is clear where a construction contract exists and who should apply CIS to whom.
3. CIS verification and returns. Verification results held before the first payment, the deduction rate applied, and monthly CIS300 returns and deduction statements reconciled to bank payments.
4. Payroll evidence for PAYE workers. Payslips, Real Time Information submissions and, where an agency does not operate PAYE for a worker, the quarterly employment intermediary report HMRC requires.

Module 7 of the OPRaaS LSCA Self-Certification Course covers the difference between the two schemes in its topic Payroll PAYE and CIS: A Clear Comparison. Module 9 asks the question directly in Compliant CIS Subcontractor Contracts: where the agency rules apply because the worker is under supervision, direction or control by any person, is PAYE operated instead of CIS?

How OPRaaS audits support PAYE or CIS evidence

OPRaaS, On-Pay-Roll-as-a-Service, is a systemised governance and workforce management partner for organisations that rely on temporary, contractor and contingent labour, including temps, freelancers, contractors, interims and consultants.

The OPRaaS audit platform puts structured questions to the agencies and umbrella companies in a construction supply chain on CIS, PAYE, employment status and fraud controls, and holds the evidence behind each answer. Answers are scored, and each audit produces a PDF report with that evidence linked.

Alongside the platform, the OPRaaS Virtual Compliance Director (OPRaaS VCD) runs a quarterly risk-check cycle on umbrella companies on a preferred supplier list, covering payslips, credit scores, director changes and VAT registration, with Companies House used for director and ownership changes and Creditsafe for credit-risk changes. The PAYE or CIS decision itself stays with the agency and its client.

OPRaaS is named as a supplier on the UK Government Commercial Agency (formerly Crown Commercial Service) Audit and Assurance Services Two framework (RM6310), Lot 2: External Audit and Lot 4: Other Independent Assurance, and is registered on the RM6219 Learning and Training Services and RM6237 Low Value Purchase System dynamic purchasing systems. The OPRaaS LSCA platform is available on G-Cloud 15 (RM1557.15), Lot 2b: Software as a Service.

Three PAYE or CIS questions for agency directors this month

For directors of agencies supplying construction labour, pick one live site and ask three questions. Who directs how the work is done? Which business holds the construction contract? Which scheme is each worker paid under, and where is the record of why?

If an answer takes days to find, the decision has not been recorded. The scheme may still be right. The evidence is what is missing.

Compliance is your asset. Evidenced daily.

Read next

“What will HMRC ask about your CIS due diligence when it reviews your supply chain?“

This article draws on HMRC’s Employment Status Manual at ESM2031, ESM2034, ESM2042, ESM2060 and ESM10004A, its Construction Industry Scheme Reform Manual at CISR13050, the First-tier Tribunal decision in Harbron Recruit Ltd v HMRC, and Modules 7 and 9 of the OPRaaS LSCA Self-Certification Course.