Using Subcontractors: CIS Tax Deductions, IR35 Risks, Written Contracts and Insurance Requirements

Quick Answer: When you pay another tradesperson for construction work, you are usually a "contractor" under the Construction Industry Scheme (CIS) and must deduct tax from the labour element before paying them: 20% from a registered subcontractor, 30% from an unregistered one, or 0% if they hold Gross Payment Status. You verify each subcontractor with HMRC, file a monthly CIS return (CIS300) by the 19th, and pay deductions to HMRC. Separately, watch IR35/employment status: if a "subbie" is really a disguised employee — under your control, no right of substitution, mutuality of obligation — HMRC can reclassify them and pursue you for PAYE and NI. Always use a written subcontract and check the subbie holds their own public liability insurance.

Summary

The day you stop being a one-person band and start paying another tradesperson to do work for you, your tax and legal obligations change overnight. You become a "contractor" in HMRC's eyes, with deduction and reporting duties under the Construction Industry Scheme, and you take on the risk of getting the worker's employment status wrong. Most disputes and tax bills in this area come from treating a regular subbie as casual when, in HMRC's eyes, they had become a de facto employee.

There are three distinct things to get right, and they are often confused. First, CIS — the construction-specific tax deduction scheme that governs how you pay labour. Second, employment status / IR35 — whether the person is genuinely self-employed, a worker, or really an employee, which determines who owes PAYE and National Insurance. Third, the commercial protections — a written subcontract that defines scope, price and liability, and confirmation that the subbie carries their own public liability insurance so their mistakes do not land on your policy. CIS is about tax; status is about who is liable; the contract and insurance are about risk.

This article is the practical "I'm hiring help" companion to the existing wiki pages: see cis scheme for the full CIS mechanics, subcontractors for the detailed employment-status tests, and subcontracting for the labour-only and VAT reverse-charge angle. Here we tie them together for the contractor who is taking someone on for the first time.

Key Facts

• CIS deduction rates — 20% from a registered subcontractor; 30% from an unregistered subcontractor; 0% if the subcontractor holds Gross Payment Status (GPS)
• Deduction applies to labour only — never deduct CIS from the cost of materials, plant hire charged with an operator's materials, or VAT. Deduct only from the labour element
• You must register as a CIS contractor with HMRC before the first payment to a subcontractor
• Verify before you pay — verify each subcontractor with HMRC (online or via software) to get the correct deduction rate; do not assume 20%
• Monthly CIS return (CIS300) — due by the 19th of each month covering payments in the tax month ending the 5th; £100 penalty for a return up to one month late, escalating thereafter
• Pay deductions to HMRC — by the 22nd (electronic) / 19th (post) of the month, alongside any PAYE
• Payment & deduction statement — give each subcontractor a CIS statement within 14 days of the end of the tax month
• Gross Payment Status thresholds — turnover test: net construction turnover (excluding VAT and materials) of at least £30,000 per sole trader/partner/director, or at least £100,000 for the whole business, plus a compliance test and a business test
• IR35 / off-payroll — the risk that a "subbie" is a disguised employee; tested on control, right of substitution, and mutuality of obligation (MOO), plus financial risk and integration
• HMRC CEST tool — the free "Check Employment Status for Tax" tool gives HMRC's view of status; keep the result on file
• Consequences of getting status wrong — HMRC can reclassify the worker as employed and pursue you for unpaid PAYE, employer's and employee's NI, plus interest and penalties — potentially years back
• CIS is separate from employment status — being inside CIS does not make someone self-employed; you can have a genuine subcontractor under CIS or a misclassified employee under CIS
• Written subcontract — define scope, price basis, payment terms, who supplies materials, insurance, and that the relationship is contractor-to-contractor (not employment)
• Subbie's own public liability insurance — always check it exists and is current (typically £1m–£5m cover); get a copy of the certificate; your PL may not extend to their negligent work
• Right to work checks — you must verify the right to work of anyone you employ; for genuine subcontractors the duty differs, but illegal-working penalties (up to £60,000 per worker since 2024) make checks prudent

Quick Reference Table

Detailed Guidance

CIS — how paying a subbie actually works

CIS is HMRC's mechanism to stop tax evasion in construction by collecting tax at source. As the contractor (the one paying), you:

1. Register as a contractor with HMRC before paying anyone for construction work.
2. Verify the subcontractor before the first payment. HMRC tells you whether to deduct 20%, 30%, or 0% (GPS). Verification gives you a verification number — keep it.
3. Split labour from materials. On an invoice of £1,000 + VAT where £400 is materials and £600 is labour, you deduct CIS only from the £600. At 20%, that is a £120 deduction. You pay the subbie £880 + the VAT, and send the £120 to HMRC.
4. File a CIS300 return every month by the 19th, listing every subcontractor paid and the deductions made — even if you made no payments (a nil return is required).
5. Pay the deductions to HMRC by the 22nd (electronic).
6. Give the subbie a statement within 14 days of the tax month end so they can reclaim the deduction against their own tax bill.

What's in and out of scope: CIS covers most construction operations — building, alteration, repair, demolition, installation of systems, site clearance, decoration. It excludes some professional services (architecture, surveying), manufacture of materials off-site, and certain delivery/scaffold-hire-only arrangements. If unsure whether work is "construction operations," check HMRC's CIS guidance — getting it wrong both ways (deducting when you shouldn't, or not deducting when you should) creates problems.

Employment status and IR35 — the bigger financial risk

CIS handles the tax deduction, but it does not answer whether the person is genuinely self-employed. That is a separate question, and getting it wrong is the more expensive mistake. If a worker you treat as a CIS subcontractor is, on the facts, an employee, HMRC can come after you — the engager — for the PAYE and National Insurance that should have been operated, going back years, plus interest and penalties.

The three classic tests:

• Control — do you tell them how, when and where to do the work, or do they decide? A subbie who turns up when you tell them, does what you tell them, in your way, looks like an employee.
• Right of substitution — can they send a competent substitute in their place, or must they do it personally? A genuine business can substitute; an employee cannot. This is one of the strongest single indicators.
• Mutuality of obligation (MOO) — are you obliged to offer work and are they obliged to accept it? Ongoing, expected work week after week looks like employment; project-by-project engagement does not.

Supporting factors: who provides the tools and materials, who bears the financial risk of mistakes, whether they work for other clients, whether they invoice and are VAT-registered, and how integrated they are into your team.

IR35 / off-payroll working is the same status question applied where the subbie works through their own limited company (a "personal service company"). For private-sector engagements, the responsibility for the status determination can sit with the engager where the engager is a medium or large business; small engagers are generally outside the off-payroll rules, but the underlying status question and the risk of a reclassified employee remain. Use HMRC's CEST tool, save the result, and keep evidence (the contract, invoices, the substitution clause being real) that supports genuine self-employment.

The danger pattern: the long-term "subbie" who has worked only for you, full-time, for two years, uses your van and tools, takes holiday when you say, and could not send anyone else. On paper a subcontractor; in HMRC's eyes, an employee. That is the engagement that generates a tax bill.

Written subcontracts — what to put in

A written subcontract protects you commercially and helps demonstrate a genuine business-to-business relationship. Include:

• Scope of work — exactly what the subbie is responsible for, to what standard, by when.
• Price basis — fixed price or day rate; whether it is for labour only or labour and materials.
• Payment terms — when invoices are paid, and that CIS deductions will be made from the labour element.
• Materials — who supplies and pays for them; storage and wastage responsibility.
• Programme — start, key dates, completion; consequences of delay.
• Insurance — requirement that the subbie holds their own public liability (and, if employing others, employer's liability) insurance, with evidence supplied.
• Defects / putting right — that the subbie returns to remedy defective work at their own cost.
• Substitution and independence — confirm the subbie may use a competent substitute and works as an independent business (supports self-employed status).
• Health & safety — compliance with site rules, CDM duties, RAMS where required.

Insurance — never assume your policy covers their work

A subcontractor's negligence can cause major loss — a flood from a botched joint, a fire from poor electrical work, damage to the client's property. Do not assume your own public liability policy will cover the consequences of work done by someone else. Always:

• Confirm the subbie holds public liability insurance (commonly £1m, £2m or £5m of cover depending on the work) and get a copy of the certificate, checking the dates and the activities covered.
• If the subbie employs anyone, confirm they hold employer's liability insurance (a legal requirement, minimum £5m).
• Tell your own insurer/broker that you use subcontractors — many PL policies have specific terms about subcontracted work and may exclude or limit cover if not declared.
• For specialist or high-risk work (electrical, gas, structural), confirm the subbie holds the relevant professional/scheme registration as well as insurance.

Subcontractor Engagement Checklist

• Registered as a CIS contractor with HMRC (before first payment)
• Subcontractor verified with HMRC — correct deduction rate confirmed
• Employment status assessed (CEST result saved) — genuinely self-employed
• Written subcontract signed (scope, price, payment, insurance, substitution)
• Public liability insurance certificate obtained and checked (dates + activities)
• Employer's liability checked if subbie employs others
• Own insurer informed that subcontractors are used
• Right-to-work checked where relevant
• Process in place to file monthly CIS300 and issue deduction statements

Frequently Asked Questions

Do I have to register for CIS just to pay one labourer occasionally?

If you are paying for construction operations and you are a business in construction, yes — you become a contractor under CIS and must register before the first payment, verify the subcontractor and operate deductions, even for occasional one-off payments. The scheme does not have a "casual" exemption for the construction trade. There are limited exceptions (for example certain very small or non-construction businesses spending under a threshold on construction), so check HMRC's contractor guidance for your situation.

What's the difference between CIS and IR35?

CIS is a tax-collection mechanism: it governs how much tax you deduct from a subcontractor's labour payment. IR35 (off-payroll working) is about employment status: whether a worker operating through their own company is really a disguised employee. They are independent. A worker can be inside CIS (you deduct 20%) and still fail an IR35/status test (HMRC says they should be on your payroll). Deducting CIS does not prove someone is self-employed.

Can I deduct CIS from the materials a subcontractor buys?

No. CIS deductions apply to the labour element only. You must not deduct from the cost of materials, fuel for plant, plant hire where charged separately, or VAT. The subcontractor should split labour and materials on their invoice. If they do not, you may have to make a reasonable estimate of the labour element — but never deduct from genuine, evidenced material costs.

What happens if HMRC decides my subbie was really an employee?

HMRC can reclassify the worker and pursue you, the engager, for the PAYE income tax and National Insurance (both employee's and employer's) that should have been deducted, going back several years, plus interest and penalties. You may also owe holiday pay and face employment-tribunal claims for worker/employee rights. This is why saving a CEST result and using a genuine subcontract with a real substitution right matters — they are your evidence that the relationship was genuinely self-employed.

Does my public liability insurance cover work done by my subcontractors?

Not automatically. Many policies require you to declare that you use subcontractors and may exclude or limit cover for their work if you have not. The safest approach is to (1) require each subbie to hold their own public liability insurance and get the certificate, and (2) tell your own insurer/broker you use subcontractors so your policy is arranged accordingly. Never assume your policy is a backstop for someone else's negligence.

Regulations & Standards

• Finance Act 2004 (Part 3, Chapter 3) and the Income Tax (Construction Industry Scheme) Regulations 2005 — the legal basis for CIS, deduction rates and contractor obligations

• Income Tax (Earnings and Pensions) Act 2003 — Chapter 8/10 (IR35 / off-payroll working) — disguised-employment rules for personal service companies

• Employment Rights Act 1996 — definitions of employee and worker status; rights that flow from misclassification

• Employers' Liability (Compulsory Insurance) Act 1969 — minimum £5m employer's liability cover where a subbie employs others

• CDM 2015 — health and safety duties that pass to contractors and subcontractors on site

• Immigration, Asylum and Nationality Act 2006 — illegal-working civil penalties (up to £60,000 per worker since 2024)

• GOV.UK — Construction Industry Scheme (CIS): contractor guidance — registration, verification, deductions and returns

• GOV.UK — CIS deduction rates and what's covered — scope, in/out of CIS, materials

• GOV.UK — Check Employment Status for Tax (CEST) — HMRC's status determination tool

• GOV.UK — Off-payroll working (IR35) — disguised-employment rules and who is responsible

• HMRC — CIS340 Construction Industry Scheme guide — the detailed CIS reference manual

• cis scheme — full CIS mechanics: deduction rates, Gross Payment Status, CIS300 returns and reverse-charge VAT interaction

• subcontractors — detailed employment-status tests (control, substitution, MOO) and PAYE liability risk

• subcontracting — labour-only subcontracting and the domestic reverse charge for VAT

• insurance — public and employer's liability cover and how subcontractor use affects your policy