Becoming an audit ready construction company: what HR and contracts you need

Two different things get called an audit and they have almost nothing to do with each other.

The first is a statutory audit of your accounts. For financial years starting on or after 6 April 2025, a private company can use the audit exemption if it meets at least two of three tests: turnover no more than £15 million, assets no more than £7.5 million, and 50 or fewer employees on average. Most construction companies we work with sit comfortably inside that. But exemption is not automatic in every case. If you are a subsidiary, or shareholders holding at least 10 per cent of the shares write in asking for an audit at least a month before the year end, you are having one.

The second is the one that actually costs you work: a client or main contractor auditing your systems before they let you on a large project. Public sector work, defence sites, anything with a serious principal contractor behind it. That audit looks at contracts, HR records, insurance, safety policies and how you engage labour. We sat in our Luton office with a client and their auditor for exactly this reason, and the issues that came up were not accounting ones.

When someone asks for your HR pack, they are looking for a short list of documents that prove you run a real employer, not a van and a phone.

• Written statements of employment particulars for everyone on PAYE, issued on or before their first day.
• A staff handbook covering discipline, grievance, absence, holiday and working time.
• A health and safety policy, with risk assessments and method statements that reference the work you actually do.
• Training and certification records, including CSCS cards, with expiry dates somewhere other than a drawer.
• Right to work checks on file for every person, with the evidence stored properly.

Most firms have fragments of this. A contract template downloaded in 2019, a handbook borrowed from a previous employer, a safety policy with another company’s name still in the footer. An auditor will spot that in minutes, and so will a prospective client’s compliance team.

For construction clients we arrange a discounted Croner subscription so the HR, employment contracts and safety policies are written and kept current by people who do that for a living. It means the file exists before anyone asks to see it, and it stays right as employment law shifts.

The contracts you hand to subcontractors used to be about payment terms and retentions. From 1 October 2026 they do something else as well.

The right to work rules were extended so that a business providing work or services and subcontracting part of it can face a civil penalty where someone further down the chain has no right to work. It runs down the whole chain, and the Home Office decides who gets penalised, which matters most when nobody can say who actually engaged the person on site. Penalties for illegal working reach £60,000 per worker, and serious cases can bring criminal liability.

There is a statutory excuse, but it has to be met in full. In practice that means your written terms oblige the firms below you to run compliant checks, ban further subcontracting without your written consent, give you audit rights, and let you suspend or terminate. If your contracts allow substitution, nobody steps on site until the substitute has been checked. And you need a way of confirming the person working is the person who was checked.

If your subcontract pack has not been looked at since before October 2026, that is the first thing we would put in front of a solicitor.

Labour-only subcontractors are normal in construction. The risk is not that you use them, it is that the paperwork says one thing and the working arrangement says another.

Someone is self employed for tax when they run their own business and carry the risk of it: they quote for work, invoice for it, are not supervised through the day, pay their own tax and National Insurance, and get no holiday or sick pay. Tax status and employment law status are separate questions, and HMRC can treat a person as self employed while employment law still gives them worker rights. If the status is wrong, the tax and penalties land on you, not on them.

Alongside that sits the Construction Industry Scheme. Every contractor registers, deductions follow the subcontractor’s status as HMRC has verified it, and materials costs come out before the deduction is worked out. From 6 April 2026 mainstream contractors have to file nil returns even in months with no payments, which catches out firms used to simply skipping quiet periods.

When we take on a construction client, this is where the money usually turns up. One company had over £100k sitting at HMRC from years of incorrect CIS and VAT returns, found in the first meeting from their own portal, while they were paying interest on a loan taken to cover the gap.

You do not need everything finished before you bid. You need the things a client checks first to exist, and a credible plan for the rest.

1. Fix the subcontract terms. The October 2026 right to work exposure is the one with the largest downside and the shortest fix.
2. Audit who is actually working for you and on what basis. Direct employees, labour-only subcontractors, agency labour, anyone brought in by someone else.
3. Get contracts and the handbook issued properly to everyone on PAYE, and the safety policy rewritten so it describes your sites.
4. Train the people who control access to site. A perfect policy that the gate does not follow is worth nothing in an audit.
5. Put CIS and VAT right, including the nil returns, so the financial side holds up when someone looks.

That last point is where we come in, and it is also the one most firms leave until a letter arrives. The HR and contract side we arrange through Croner at a discount for construction clients, because specialist employment advice should come from employment specialists. The CIS, VAT and the accounts are handled by Fasih’s construction colleague here, with a fixed fee agreed in writing before any work starts.