Are Your Subcontractors Actually Self Employed? Three Questions Worth Asking

In short: Registering someone under CIS does not make them self employed. CIS is a tax collection mechanism, not a status determination. Whether a subcontractor is genuinely self employed comes down to the reality of how you work together, tested through three questions: who controls how the work is done, whether the individual has to turn up personally or can send someone else, and whether there is an obligation to offer and accept work. Getting it wrong sits with the business paying, not the person being paid, and from April 2026 the consequences in construction became considerably sharper.

Most construction businesses have at least one. The subbie who has been on the books for years. Same squad, same sites, same start time. Invoices every week, sometimes on a duplicate book you print for them. Uses your welfare, your PPE, occasionally your van.

Ask the office and they will tell you he is a subcontractor, because that is what it says on the payment and status report, and because that is how it has always been.

Ask HMRC and you may get a different answer.

The uncomfortable truth about employment status in construction is that the label on the arrangement carries almost no weight. What matters is what actually happens on site. And the gap between the two is where liabilities get built.

Does paying someone through CIS make them self employed?

No, and this is the single most common misunderstanding in the sector.

CIS is a mechanism for collecting tax from payments to subcontractors. It says nothing about whether the person receiving that payment is genuinely self employed. The obligation actually runs the other way round: as the contractor, you are required to determine the employment status of the individual before you pay them under CIS at all. If they are an employee, you should be operating PAYE, not making a CIS deduction.

Verifying someone with HMRC does not settle it either. Verification confirms which deduction rate to apply. It does not confirm that CIS is the right regime in the first place.

Nor does the contract settle it. Courts and tribunals look at the reality of the working relationship, and a written term that does not reflect what happens in practice can be set aside entirely. A carefully drafted subcontract that describes a working arrangement nobody on site would recognise is not protection. It is evidence.

There is a further layer that catches firms using agencies or labour providers. Where a worker is supplied through an intermediary and is subject to supervision, direction or control as to the manner in which they work, separate agency rules can require PAYE regardless of what CIS says. Two entirely different tests, one working relationship, and businesses regularly satisfy neither.

Who decides how the work actually gets done?

This is the control question, and it is usually the first thing HMRC looks at.

The distinction that matters is between controlling what work is done and controlling how it is done. Telling a subcontractor which building, which elevation and what the finished specification is does not make them an employee. Telling them what time to arrive, which order to work in, which methods to use and when to take their break starts to look like something else.

Ask yourself, honestly:

• Do they set their own hours, or do they work yours?
• Can they decide the sequence and method, or are they directed day to day?
• Do they supply their own tools and equipment, or use yours?
• Are they told where to be next week, or do they choose which jobs to take?
• Do they work for anyone else, and could they if they wanted to?

One important nuance, because it is where a lot of well run firms get unnecessarily worried. Site rules and health and safety requirements are not the same as control over how the work is done. Requiring inductions, RAMS, method statement compliance and the right PPE is a legal obligation on the principal contractor, not evidence of employment. A tribunal understands the difference. The problem is not the safety framework. It is the supervision that quietly extends past it.

Can they send someone else instead?

This is the personal service question, and in construction it is frequently the most revealing of the three.

If an individual must turn up personally and you would not accept anybody else, that points firmly towards employment. If they have a genuine right to send a suitably qualified replacement at their own cost, that points towards a business supplying a service rather than a person supplying their labour.

The word doing the work is genuine. A substitution clause sitting in a contract that has never been used, and that everybody involved knows would be refused if it were ever tested, carries very little weight. This is well understood by HMRC, and it has been specifically identified by government as an area of concern, with substitution clauses that do not operate in practice named as a target for reform.

So the real questions are not contractual, they are practical:

• Has substitution ever actually happened?
• If a subbie sent a replacement tomorrow, would you accept them, or would you ring the subbie?
• Does your subcontract require your approval, and how freely is that given?
• Who pays the substitute, you or the subcontractor?

That last one is the giveaway. If you would pay the replacement directly, there was never a right of substitution. There was a labour supply arrangement with an extra step.

The squad question sits here too, and it is worth thinking about carefully. Where a gang leader supplies a team, the arrangement may be a genuine business supplying labour and taking responsibility for its own people. Or it may be several individuals engaged by you with one of them collecting the money. The difference lies in who carries the risk, who decides who turns up, who fixes defective work and who bears the cost when it goes wrong.

What happens when the work dries up?

This is mutuality of obligation, and it is the question most construction businesses have never consciously asked.

The idea is simple. Are you obliged to offer work, and is the individual obliged to accept it? A genuinely self employed contractor can turn work down without consequence, and you are free to offer them nothing at all. An employment relationship carries an expectation on both sides.

Put it to the practical test:

• When the weather stops work, do they still get paid?
• When a contract finishes, do you move them onto the next job automatically, or do they go and find work?
• If they turned down a job next month, would that affect whether you called them again?
• Are they paid a day rate for time, or priced for a job with the risk of overrunning attached?

That last distinction matters more than people realise. Payment by the day for time spent points towards employment. Pricing a job, and carrying the loss if it takes longer than expected, is genuine financial risk and one of the strongest indicators of self employment there is.

There is a significant legal development worth knowing about here. The Supreme Court confirmed in 2024 that mutuality of obligation and control can exist even within a short, single engagement, which set the bar for those two elements lower than many advisers had assumed. But that was not the end of it. When the same case returned to the tribunal in 2026, the individuals were found not to be employees once the whole picture was weighed.

The lesson is a useful one for construction. Control and mutuality are gateways, not verdicts. Passing through them does not make someone an employee. What decides it is the overall picture, considered in the round: financial risk, whether the person is genuinely in business on their own account, how the relationship works over time. Which is precisely why a single clause, a single answer, or a single run through an online tool does not settle anything.

Why does this matter more in 2026 than it did before?

Because the consequences moved, and they moved sharply, in ways that fall on the business paying rather than the person being paid.

CIS enforcement changed in April 2026. The scheme was brought into line with the anti fraud approach long used in VAT. Where HMRC considers a business knew or should have known it was part of a transaction connected to fraudulent evasion, it can now act immediately: cancel gross payment status without the usual notice, assess the associated tax loss, and impose a penalty of up to thirty per cent. That penalty can be applied to the business or to its officers. And the period before gross payment status can be reapplied for has been extended substantially.

For a subcontractor, losing gross payment status is not a compliance inconvenience. It is an immediate deduction from every payment received, indefinitely. For a main contractor, the new expectations around supply chain due diligence mean employment status can no longer be treated as an onboarding formality.

Umbrella arrangements changed at the same time. From April 2026, where an umbrella company sits in a labour supply chain and fails to account for PAYE and National Insurance correctly, joint and several liability for that shortfall can fall on the agency closest to the end client, or in some cases on the end client itself. HMRC does not have to pursue the umbrella first. Any construction business that has been comfortable because labour arrives through a third party should look again at where the risk now sits.

HMRC is actively looking. Construction has been identified repeatedly as a priority sector for status enquiries. Enquiries do not stop at contracts. They ask for payment histories, job descriptions, timesheets and handbooks, and they compare what the paperwork says with what the site says.

And the framework itself is under review. Government has committed to consulting on employment status with a view to a simpler structure, and the Employment Rights Act 2025 has already begun changing the employment rights landscape around the edges of this question. A business whose arrangements only just work today has very little margin if the definitions move.

What does getting it wrong actually cost?

More than most people expect, because the liabilities stack.

Where a subcontractor is reclassified as an employee, the exposure is not simply the tax the individual should have paid. It is PAYE and employee National Insurance that should have been deducted, employer National Insurance that was never accounted for, potentially apprenticeship levy, interest running from the original due dates, and penalties on top. Historic periods are in scope, not just the current year. And the liability sits with the engager.

Alongside the tax position runs the employment rights position, which is a separate test and a separate risk. Holiday pay, statutory payments and, depending on length of service, unfair dismissal protection. A worker who has been treated as a subbie for six years and is let go in a downturn has a claim available that nobody budgeted for.

Common mistakes we see

• Assuming that CIS registration and HMRC verification settle the status question
• Substitution clauses that exist on paper and have never been used or would never be accepted
• Long standing subbies who work only for you, on your hours, with your equipment
• Paying day rates for time rather than pricing work with genuine risk attached
• Treating labour arriving through an agency or umbrella as somebody else's compliance problem
• Relying on a single online status check without documenting the reasoning behind the answers
• Contracts that were drafted once and never revisited as the working relationship changed
• No audit trail showing how a status decision was reached or when it was last reviewed

How Pulse helps construction businesses get this right

Construction is one of our largest sectors and this is one of the areas where we do the most preventative work, because it is far cheaper to review an arrangement than to defend one.

• Status reviews of your actual engagements, tested against how work happens on site rather than how the contract describes it
• Contract and working practice alignment, so the paperwork and the reality tell the same story
• A documented audit trail of how each status decision was reached and when it was last reviewed, which is what HMRC asks for first
• Supply chain due diligence appropriate to the April 2026 CIS regime, covering agencies, umbrellas and labour providers
• CIS process and gross payment status protection, because the two risks now sit closer together than they ever have
• Restructuring where the answer is uncomfortable, including moving people onto payroll properly and managing the cost of doing so
• Joined up advice across CIS, VAT and payroll, because in construction these move together

We would far rather have this conversation with you before HMRC has it with you.

Talk to us before HMRC does

If you engage subcontractors and you have never formally reviewed their status, or you have a nagging feeling about one or two arrangements in particular, that instinct is usually right.

Pulse Accountants and Tax Advisers work with construction businesses throughout the UK, from our headquarters in Newton Aycliffe, County Durham, and our offices in Newcastle and London.

Get in touch for an employment status review.

FAQs

Does being registered for CIS mean you are self employed?

No. CIS is a tax collection mechanism, not a determination of employment status. A contractor is required to establish whether an individual is genuinely self employed before paying them under CIS. If the person is in reality an employee, PAYE should be operated instead, and verifying them with HMRC does not change that.

How does HMRC decide if a subcontractor is really an employee?

By looking at the reality of the working relationship rather than the contract. The core elements are control over how the work is done, whether the individual must provide their services personally or can send a substitute, and whether there is an obligation on one side to offer work and the other to accept it. Where those are present, the overall picture is then weighed, including financial risk and whether the person is genuinely in business on their own account. No single factor decides it.

Can a subcontractor send someone else to do the work?

If they have a genuine right to send a suitably qualified substitute at their own cost, that points strongly towards self employment. The right has to be real. A substitution clause that has never been used, that requires approval which would not be given, or where the engager would pay the replacement directly, carries very little weight with HMRC or a tribunal.

Does telling a subcontractor to follow site rules make them an employee?

No. Requiring site inductions, method statement compliance and correct PPE is a legal health and safety obligation, not evidence of employment control. The distinction that matters is between controlling what work is done and to what standard, which is normal in any construction contract, and controlling how, when and in what order an individual carries it out.

What happens if HMRC decides my subcontractors are employees?

The liability falls on the business making the payments. That typically means PAYE and employee National Insurance that should have been deducted, employer National Insurance that was never accounted for, interest from the original due dates and penalties, covering historic periods as well as the current one. There is a separate employment rights exposure alongside it, including holiday pay and potentially unfair dismissal claims.

Is a squad or gang supplied by one person genuinely self employed?

It depends on who carries the risk. Where a gang leader runs a genuine business, decides who attends, prices the work, remedies defects at their own cost and bears the loss when a job over runs, that can be a legitimate subcontract. Where the individuals are effectively engaged by you and one person simply collects the payment, it is a labour supply arrangement with an extra step and the status question falls back on each individual.

Is day rate work a sign of employment?

It is an indicator, not a conclusion. Payment for time spent, with no risk of loss if the work takes longer than expected, points towards employment. Pricing a job and carrying that risk yourself is genuine financial risk and one of the strongest indicators of self employment. Most construction arrangements contain a mixture, which is why the overall picture matters more than any single feature.

Is my business liable if labour comes through an agency or umbrella company?

Potentially yes, and more so since April 2026. Where an umbrella company in the supply chain fails to account for PAYE and National Insurance correctly, joint and several liability for the shortfall can fall on the agency closest to the end client or, in some circumstances, on the end client itself. HMRC does not have to pursue the umbrella first. Supply chain due diligence is no longer optional.

Which accountants advise on subcontractor employment status in the North East?

Pulse Accountants and Tax Advisers are construction specialists headquartered in Newton Aycliffe, County Durham, with offices in Newcastle and London. Construction is one of our largest sectors and we advise main contractors, subcontractors and specialist trades across the North East, including Durham, Darlington, Teesside, Sunderland and Newcastle, on employment status reviews, CIS compliance, gross payment status and payroll.

Do you work with construction firms outside the North East and London?

Yes. We support construction businesses throughout the UK. Our offices in Newton Aycliffe, Newcastle and London give us a presence in both the North East and the capital, but our construction clients operate nationwide and employment status rules apply identically wherever you are based.