Managing Subcontractors: Contracts, Insurance Checks, Payment Terms and Liability

Quick Answer: Every subcontractor should sign a written contract before starting, hand over a current Public Liability certificate (£2m minimum, £5m for commercial sites), confirm UTR and CIS verification status with HMRC, and carry their own tools and PPE. The principal contractor remains liable for CDM 2015 duties, defective work to the end client, and unpaid CIS deductions. Pay against signed daywork sheets or stage completions, never on verbal promise.

Summary

Bringing in subbies is the fastest way to scale capacity without taking on PAYE staff — but it carries a stack of legal, tax and reputational risks that catch out a lot of smaller firms. HMRC will pursue the contractor for any CIS shortfall regardless of who actually did the work. The end client will sue the named contractor on the quote, not the unknown chap holding the trowel. And HSE prosecutions under CDM 2015 land on whoever is the principal contractor, not the subbie who fell off the scaffold.

Most disputes between contractors and subcontractors come from one of three things: scope changes that were never documented, payment timing assumptions that don't match reality, or insurance gaps discovered after an accident. All three are solved by a one-page written agreement signed before the first day on site, plus a habit of issuing daywork sheets or instruction notes for any change.

This article covers the practical paperwork — contract terms, insurance evidence, CIS verification, payment scheduling — and the liability boundaries you cannot subcontract away. For the tax mechanics see the CIS deduction and reporting article; for employment-status risk see the IR35 and personal-service-test write-up.

Key Facts

• Written contract before mobilisation — verbal-only arrangements are enforceable but virtually impossible to evidence in dispute
• CIS verification — HMRC online check returns gross / 20% / 30% deduction status; record the verification reference on file
• Public Liability minimum — £2m for domestic work, £5m for commercial/public-sector, £10m for some local authority and rail contracts
• Employer's Liability — required by law (£5m statutory minimum, £10m typical) if the subbie has any of their own employees on site, even apprentices
• Professional Indemnity — required only if the subbie offers design, advice or specification (e.g. M&E design-and-install)
• CDM 2015 principal contractor duties — cannot be delegated to a subcontractor; F10 notification, construction phase plan and welfare provision remain with the principal
• Defects liability — typically 12 months from practical completion; retention 2.5–5% if formalised under JCT
• Late Payment of Commercial Debts (Interest) Act 1998 — statutory 8% + Bank of England base rate on overdue B2B invoices, plus £40–£100 fixed compensation per invoice
• HMRC CEST tool — outcome is not legally binding but is HMRC's stated position; print and file the result for every long-term subbie engagement
• Reverse-charge VAT — applies between VAT-registered CIS subcontractors and contractors; subbie issues invoice with no VAT shown, contractor accounts for it
• Tools and PPE — genuine subcontractors supply their own; if you provide everything you weaken the self-employment argument

Quick Reference Table

Detailed Guidance

What a Subcontract Should Cover

A workable subcontract for domestic and small commercial trades does not need a JCT-length document. One side of A4, signed by both parties before work starts, will hold up in the small claims court and at HMRC. Cover these clauses:

1. Parties — contractor's trading name, subbie's name and UTR, project address.
2. Scope of work — describe the works in plain English, with reference to the priced quote, drawings or specification. Attach the priced schedule.
3. Price basis — fixed price for defined scope, or day rate (with hours per day defined — usually 8 productive hours), or schedule of rates for measured work.
4. Programme — start date, target completion, expected man-days. Note that programme is indicative unless damages for delay are agreed.
5. Payment terms — interim valuations or stage payments, timing (e.g. weekly daywork, fortnightly application, payment 14 days from receipt of invoice), retention if any.
6. CIS — confirm CIS deduction rate per HMRC verification.
7. Variations — no extras to be paid without a signed instruction or daywork sheet from the contractor's site representative.
8. Insurance — subbie warrants Public Liability of £X million is in force throughout the contract, copy attached.
9. Health and safety — subbie complies with the construction phase plan, attends induction, supplies own PPE and small tools.
10. Defects — subbie returns to rectify defective work within 12 months of completion, at no cost.
11. Termination — either party may terminate on 7 days' notice for material breach; contractor may terminate immediately for safety breach or no-show.

For higher-value work (over about £25,000) consider JCT Sub-Subcontract or the FMB Domestic Subcontract template — both are widely used in the trade and recognised in dispute.

Verifying Insurance Properly

A scanned certificate is not proof of cover. Insurance can be cancelled mid-policy for non-payment, false declarations or undisclosed claims. Three checks every time:

• Confirm the certificate is current — date of issue, period of insurance, named insured matches the subbie's trading name.
• Confirm the activities covered — many cheap policies exclude "hot works", "work at height over 2m", or "work to property of the assured". A roofer with a £2m policy excluding work at height is not insured.
• Spot-check with the broker — for ongoing relationships, phone the broker once a year to confirm the policy is in force. Brokers will confirm yes/no without breaching confidentiality.

If a subbie cannot produce a certificate within 24 hours of asking, assume they don't have current cover.

CIS Verification and Payment

Every subbie engaged in CIS-scope work must be verified with HMRC before first payment. The CIS online service returns one of three outcomes:

Deduct from labour only — materials, plant hire and CIS-exempt supplies are not subject to deduction. Record the verification reference number on the subcontractor's file. Re-verify if HMRC notify a status change or if the subbie has not been paid in the last two tax years.

Issue a CIS Payment & Deduction Statement within 14 days of the end of each tax month for every subbie paid that month. File the monthly CIS300 return by the 19th of the following month — penalties start at £100 for one day late and escalate quickly.

Payment Timing — Where Disputes Start

Most subbie disputes are about money, and most money disputes are about timing rather than amount. Set out clearly:

• Application date — when the subbie submits their valuation or invoice (e.g. last Friday of each month, or end of each working week for daywork).
• Due date — when payment becomes due (typically 14 or 30 days from application).
• Final date for payment — the latest the contractor can pay without breach (typically 17 or 30 days from due date under the Construction Act for projects over £1k).

For projects over £1,000 covered by the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), the contractor must:

• Issue a payment notice within 5 days of the due date stating the sum considered due.
• Issue a pay-less notice if intending to pay less than the notified amount, no later than 7 days before the final date for payment.
• Failure to issue notices means the subbie's application becomes the "notified sum" — contractor is legally obliged to pay the full amount applied for, regardless of whether the work justifies it. This is the "smash and grab" adjudication route and contractors lose it routinely.

Liability — What You Cannot Subcontract

Some duties stay with the principal contractor regardless of who does the work:

• CDM 2015 duties — F10 notification (projects over 30 days or 500 person-days), construction phase plan, welfare facilities, principal contractor coordination. HSE will prosecute the principal, not the subbie.
• Defective work to the end client — the customer's contract is with the contractor named on the quote. If the subbie's tiling fails, the customer sues the contractor; the contractor then pursues the subbie.
• Building Regulations compliance — Building Control deals with the named applicant. If the work fails inspection, it is the contractor's problem to fix and re-present.
• Competent person scheme certification — the registered person (Gas Safe, NICEIC, FENSA) signs off. They cannot delegate this; they must inspect what the subbie did and put their name to it.
• Unpaid CIS deductions — if HMRC find a subbie was misclassified as self-employed when they were actually a worker, the contractor pays the back PAYE, NICs and penalties.

See the competent person scheme breakdown for which trades require which scheme registration.

Employment Status Risk — The Long Shadow

The biggest hidden cost of using subbies is HMRC reclassification. If a tribunal or HMRC inspector decides your "subbie" was actually your employee, you owe:

• Back PAYE income tax, employer's NI (15.05% from 2025/26), employee's NI
• Holiday pay (5.6 weeks per year under WTR 1998)
• Auto-enrolment pension contributions (3% employer minimum)
• Penalties and interest, often going back 4–6 years

Indicators of self-employment HMRC look for:

• Personal service — the subbie can send a substitute (genuine right, not theoretical)
• Control — subbie decides how to do the work, not just the outcome
• Mutuality of obligation — no obligation on contractor to offer further work or on subbie to accept it
• Financial risk — subbie quotes for the job, bears the risk of overrun, supplies own tools and materials

Run the HMRC CEST tool for every long-term engagement. The output is not binding but it represents HMRC's stated position and is good defensive evidence. Keep printed copies on file for at least six years.

Frequently Asked Questions

Can I make a subbie sign a contract that bans them working for my competitors?

Restrictive covenants in subcontractor agreements are largely unenforceable in trades work. Restraint of trade clauses must be reasonable in scope, geography and duration, and must protect a legitimate business interest (typically client lists or confidential information). A flat ban on working for competitors will be struck down. A short, narrow non-solicit clause preventing the subbie poaching your specific named clients for 6–12 months may be enforceable if the subbie was genuinely exposed to those client relationships.

Do I need to give a subbie holiday pay or sick pay?

No, not if they are genuinely self-employed. If you are paying holiday pay or sick pay, that itself is strong evidence of employment status, not self-employment. The trade-off is that genuine subbies build their own day rate to cover their own time off — typical loadings are 10–15% above an equivalent PAYE hourly rate.

What happens if a subbie's worker injures themselves on my site?

If the subbie has Employer's Liability insurance (legally required if they have any staff) the worker's claim goes to the subbie's insurer. As principal contractor you remain liable under CDM 2015 for site safety arrangements — HSE may prosecute you for failures in the construction phase plan, welfare or coordination even if the immediate cause was the subbie's fault. This is why proof of EL insurance and a documented site induction are non-negotiable.

Should I deduct CIS from a Ltd company subbie?

Yes — CIS applies to limited companies as well as sole traders. Verify the company UTR with HMRC just as you would for a sole trader. The deduction goes against the company's corporation tax rather than personal tax, but the verification and PDS process is identical.

Can a subbie refuse to take on a job mid-contract?

Yes — that is one of the defining features of self-employment. A genuine subbie can decline work, send a substitute, or walk off site (subject to any contractual notice period). If you are insisting they personally show up every day or face penalties, you are treating them as an employee.

Regulations & Standards

• Construction Industry Scheme (CIS) — Finance Act 2004, Part 3, Chapter 3; HMRC CIS Manual

• Construction (Design and Management) Regulations 2015 (CDM 2015) — HSE L153 guidance

• Housing Grants, Construction and Regeneration Act 1996 (as amended by LDEDC Act 2009) — payment notices, adjudication, statutory rights to interim payment

• Late Payment of Commercial Debts (Interest) Act 1998 — statutory interest and compensation on overdue B2B invoices

• Employers' Liability (Compulsory Insurance) Act 1969 — £5m statutory minimum EL cover

• VAT (Section 55A) — Domestic Reverse Charge for Construction Services — applies between VAT-registered CIS contractors and subcontractors from 1 March 2021

• Working Time Regulations 1998 — 5.6 weeks paid annual leave for workers; relevant to misclassification risk

• Income Tax (Earnings and Pensions) Act 2003 (ITEPA), Part 2 Chapter 8 — IR35 / off-payroll working rules

• HMRC CIS guide for contractors and subcontractors (CIS340) — definitive HMRC manual

• HMRC Check Employment Status for Tax (CEST) — official status determination tool

• HSE CDM 2015 guidance L153 — principal contractor duties

• Gov.uk Domestic Reverse Charge VAT for construction — reverse charge mechanics

• JCT Construction Contracts — Sub-Subcontract templates

• FMB Domestic Subcontract — short-form contract suitable for domestic trades

• the employment-status and IR35 deep-dive — personal service test, mutuality of obligation, CEST evidence

• CIS deduction rates, monthly returns and gross payment status

• written-contract essentials and JCT vs FMB templates

• the trades insurance buyer's guide for PL, EL, PI and tool cover

• which competent person scheme covers which works