Two different questions
CIS answers "how is tax deducted from this payment?" Employment status answers "is this person really self-employed?" Verifying a subcontractor, deducting 20% and filing the CIS return doesn't touch the second question. If HMRC decides a labour-only subcontractor was in substance an employee, the PAYE and employer's National Insurance that should have been operated become your liability, with interest and penalties, and the enquiry can go back four years, six if careless.
For a contractor with twenty labour-only subbies on £35,000 a year, employer's NI alone is in the region of £70,000 a year. Multiply by four. It is the largest unquantified tax exposure in most construction businesses, and the one least often looked at.
The factors HMRC applies
| Factor | Points to employment | Points to self-employment |
|---|---|---|
| Control | You decide what they do, when, where and how | They decide how the work is done; you specify the result |
| Substitution | They must do the work personally | They can send a suitably qualified substitute at their own cost, and have done |
| Mutuality of obligation | You offer work continuously; they're expected to take it | Job by job; either side can decline the next one |
| Financial risk | Paid by the hour or day regardless of outcome; no risk of loss | Priced work; they bear the cost of putting defects right; can make a loss |
| Equipment | Use your tools, van, materials | Provide their own significant tools and plant |
| Integration | Look like staff: your workwear, your site induction as an employee, years of continuous engagement | Visibly a separate business: their own insurance, other customers, their own branding |
No single factor decides it. HMRC and the tribunals look at the whole picture. But the picture usually isn't subtle. The operative who has turned up every day for three years, uses your kit and takes instruction from your site manager is not self-employed, whatever his invoice says.
Who's at risk
- Highest: labour-only subcontractors engaged continuously for more than a year, paid by the hour or day, no substitution, your tools.
- Medium: labour-only subcontractors on priced work who sometimes bring their own kit and have other customers.
- Low: supply-and-fix subcontractors with their own materials, insurance, employees and a trading business.
Gangs and gangmasters are a special case: if you pay a gang leader who pays the others, status attaches to the leader's arrangement with you and his with them.
What an enquiry looks like
HMRC opens an employer compliance review, asks for your subcontractor list and payment records, and interviews a sample of operatives about how they actually work. The written contract matters less than the facts on the ground. If they conclude employment, the assessment covers the tax and NI that should have been operated, interest, and a penalty based on behaviour. Settlement usually involves putting the people on payroll going forward as well.
What to do: the annual review
- List every labour-only subcontractor with start date and how they're paid.
- Answer the six factors honestly for each. Score the risk.
- For high-risk arrangements, decide: move them to PAYE; engage them through a compliant umbrella company that operates PAYE; or restructure the arrangement so it genuinely reflects self-employment (priced work, substitution in practice, their own equipment).
- Document the review: date, names, answers, decisions. File it. If HMRC asks, this is the difference between a conversation and a bill.
- Diary it for next year.
The cost comparison
Moving a £35,000 operative onto payroll costs roughly £5,000 a year in employer's NI and pension, plus holiday pay. Set against four years of back tax, interest and penalties, and the management time of an enquiry, it is almost always cheaper to get it right now. And a properly employed workforce is easier to plan, train and keep.
Sources
Questions people ask
Does a written contract saying they're self-employed protect me?
No. HMRC and tribunals look at the reality of the working relationship. A contract helps only if the facts match it.
What about IR35?
IR35 applies where the worker operates through their own limited company. For sole-trader subcontractors, the ordinary employment status tests apply directly. Both can bite in construction.
Is an umbrella company a safe option?
A compliant umbrella that operates PAYE and holds the employment relationship removes the status risk from you. Check it's accredited and that it isn't running a tax avoidance scheme; some have.
Can HMRC's CEST tool decide this for me?
CEST gives an indication and HMRC will stand by its result if the inputs were accurate. It's a useful part of the review, but the inputs are the hard part.
About the author. Chris Neuman is the founder of Taxtful, accountants and advisers to UK construction companies turning over £1m to £15m. Taxtful is construction-only: every client, every template, every conversation. This article is general guidance, not advice on your circumstances; rates and rules change, so check the current position before acting.