13th July 2025

Ensuring Your Contractor Payroll is HMRC-Compliant

Managing contractor payroll is complex, with HMRC rules around employment status and tax. Mistakes can result in fines and back payments. Owen Daniels' STEM recruitment expertise ensures proper classification, accurate payments, and full reporting compliance for your technical workforce.

Contractor vs Employee Status (IR35)

Compliance starts with correctly determining employment status (IR35 – Inside vs Outside). HMRC typically assesses this using three tests:

Control – Who decides how, when, and where the work is done?
Substitution – Can the contractor send a substitute?
Mutuality of Obligation – Is there an ongoing work obligation?

It’s key to understand whether to pay your workers as a business or as an employee. Misclassification can trigger IR35 investigations, leading to tax and NI demands, particularly critical in STEM sectors where contractor arrangements are common.

How we support: Owen Daniels offers expertise and an online status determination tool that provides instant determinations, with borderline cases assessed by IR35 experts.

Documentation and Record-Keeping

Clear contracts, accurate invoices, and timesheets support are key parts of record-keeping. We provide transparent, audit-ready processes with embedded dispute procedures and comprehensive contract reviews.

Payroll Processing Requirements

Maintain accurate records of all payments – potentially for up to 7 years.
Follow contract terms for payment processing.
File accurate returns and preserve compliance documentation.

IR35

Ensure you keep a compliance trail of your determinations.
Track who is responsible for the deduction of any PAYE/NICs.
Make sure you’ve issued Status Determination Statements (SDS).

How we support: We handle Tax & National Insurance (NI) compliance through our advanced Pay & Bill systems, which perform timely PAYE and NI calculations with consolidated invoicing and real-time reporting across your contingent workforce. Our IR35 tool keeps a clear audit trail and automates/tracks the SDS, including any dispute processes.

Right to Work

UK employers have a legal obligation to verify that all contractors, whether operating through limited companies (LTD) or PAYE arrangements, have the right to work in the UK. This applies to contractors and permanent employees.

Key Requirements:

Document Verification – Check original documents from the approved list (passport, driving licence, etc.) before work commences.
Digital Verification – Use the government's online right to work service for British and Irish nationals, where possible.
Ongoing Monitoring – Track visa expiry dates and conduct follow-up checks for time-limited permissions.
Record Keeping – Maintain copies of documents and verification records for the duration of the engagement plus two years.

Failure to conduct proper right-to-work checks can result in civil penalties of up to £20,000 per illegal worker and potential criminal prosecution.

How we support: Owen Daniels partners with leading digital right-to-work services that streamline verification through secure online portals. Our integrated system automatically tracks contractor permissions, sends renewal alerts, and maintains compliant documentation, removing the administrative burden while ensuring full legal compliance.

Agency Workers Regulations and Pensions

The Agency Workers Regulations (AWR) grant temporary workers certain rights from day one, with additional equal treatment rights after 12 weeks in the same role. Key elements include:

Facilities Access – Immediate right to use collective facilities like canteens, childcare, and transport services.
Information Rights – Access to job vacancy notifications from day one.
Equal Pay – Same basic pay and overtime rates as permanent employees after 12 weeks.
Working Time – Equal rest breaks, rest periods, and annual leave entitlements after 12 weeks.

Pension Auto-Enrolment is mandatory for all eligible workers. Employers must automatically enrol qualifying workers annually into a pension scheme.

How we support: Our Pay & Bill software automatically tracks AWR qualifying periods, distinguishing between day 1 and week 12 rights, calculating when equal treatment obligations begin and monitoring compliance across your contractor workforce. The system handles pension auto-enrolment, manages contribution calculations, and generates all required compliance reporting.

Supporting your business – Audits and Technology

Our tech-driven solutions offer real-time visibility and compliant audit trails. We conduct tailored business audits, vet suppliers and help you create clear policies for IR35, right-to-work and much more.

Contractor payroll compliance is complex, but it is manageable with proper systems. At Owen Daniels, our integrated Payroll & Compliance service covers: