The Inland Revenue is to send letters to 13,000 contractors and 44,000 subcontractors warning them not to classify their workers as self-employed if they are not.

The letters, which go out next week, will be followed by “compliance reviews” of each of the businesses.

Companies could face big bills for unpaid tax, National Insurance and interest payments if they have transgressed.

Any firm that fails to act on the letter and is subsequently found in breach of a tax regulation could face punitive sanctions.

Anne Redston, tax partner at Ernst & Young, said: “The costs of failing a Revenue audit will be high but the knee-jerk reaction, putting all workers on the payroll, will damage business in other ways.”

The construction industry has a bad reputation for encouraging workers to reduce or avoid tax by claiming to be self-employed when they are not.

The clampdown follows previous failed attempts to stop contractors adopting these practices. In 2001 a unit was established to monitor the use of CIS cards issues to the self-employed, which led to a dip in the numbers of staff claiming to be self-employed.

The letters make it clear that the possession of a CIS card does not determine whether an individual is self-employed – that judgment is based on the terms, conditions and facts of the engagement.

The Revenue recommends that businesses use its guidance in leaflet IR56 Employed or Self Employed? A Guide to Employment Status for Tax and National Insurance Contributions if they are in doubt over a worker’s status.

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