Subcontractor vs Employee: Trade Status Rules

Subcontractor vs Employee: Getting It Right

Employment status is decided by how the working relationship actually works, not by what you call it or what the paperwork says. You can label someone a subcontractor, pay them through CIS and have them invoice you every week — and HMRC can still decide they were an employee all along, with the tax bill landing on you rather than on them. That is the risk worth understanding before you take anyone on.

Why this matters more for trades than most sectors

Construction runs on subcontracting. The Construction Industry Scheme exists precisely because so much work is done by self-employed people moving between contractors, and CIS gives HMRC a way to collect tax at source: 20% deducted for registered subcontractors, 30% for unregistered, and 0% for those with gross payment status.

But CIS is a tax-collection mechanism. Registering someone under CIS and deducting the right percentage does not determine their employment status, and it does not protect you if the status is wrong. Those are two separate questions and it is very common to answer the first correctly while getting the second wrong.

What actually decides status

HMRC and the courts look at the reality of the arrangement. A handful of factors do most of the work:

Control. Do you tell them what to do, how to do it, when to turn up and where to be? The more you direct the detail of the work, the more it looks like employment. A genuine subcontractor is engaged to deliver a result and decides how to deliver it.

Substitution. Could they send a competent person in their place, at their own cost, without asking permission? A real and unfettered right of substitution points strongly to self-employment. A right that exists on paper but would never be allowed in practice counts for very little.

Mutuality of obligation. Are you obliged to offer work, and are they obliged to accept it? A rolling expectation of work every week looks like employment. Job-by-job engagement does not.

Financial risk. Does the person stand to lose money? Someone who quotes a price, buys materials, corrects defects at their own expense and can make a loss on a job is in business on their own account. Someone paid a day rate with no exposure is not.

Equipment. Providing your own tools, and particularly your own significant plant or a van, points towards self-employment. Turning up to use your tools points the other way.

Integration. Do they wear your branded workwear, appear on your website, use your email address, manage your staff, attend your team meetings? The more embedded they are in your business, the harder self-employment is to defend.

No single factor decides it. It is the overall picture that counts, which is what makes the borderline cases genuinely difficult.

The classic wrong arrangement

The pattern HMRC sees most often in trades looks like this: the same person, on your jobs, five days a week, for two years, paid a day rate, using your van and your tools, doing whatever you tell them that morning, with no realistic ability to send someone else and no risk of losing money.

That is an employee, whatever the invoices say. It is also extremely common, usually because everyone involved finds it convenient rather than because anyone set out to dodge tax.

What goes wrong if you get it wrong

Where HMRC reclassifies a subcontractor as an employee, the liability generally falls on the engager — you. That can mean the PAYE and National Insurance that should have been deducted, employer’s National Insurance, interest, and penalties, potentially going back several years. CIS deductions already made are usually taken into account, but they rarely cover the shortfall, because employer’s NI was never paid at all.

There is a second exposure that has nothing to do with tax. Employment rights — holiday pay, sick pay, notice, protection from unfair dismissal after the qualifying period, auto-enrolment pension — attach to status too, and employment tribunals apply their own tests. A “subcontractor” who is let go after three years can bring a claim asserting they were an employee or a worker, and the tribunal will look at the same practical realities.

Where IR35 fits

IR35, the off-payroll working rules, deals with a related but narrower situation: someone providing their services through their own limited company. The question is whether, if you ignored the company and looked at the working relationship directly, it would look like employment.

For most small trade businesses, the responsibility for making that assessment sits with the worker’s own company, because the off-payroll rules that shift responsibility to the engager apply to medium and large organisations in the private sector and to public-sector bodies. If you work as a subcontractor for a large main contractor, expect them to make a status determination about you. If you engage subbies as a small firm, your bigger exposure is ordinary employment status rather than IR35 — but check where your business sits against the small-company thresholds rather than assuming.

When each option genuinely makes sense

Use subcontractors when work is project-based or seasonal, you need a specialist trade for part of a job, the volume of work is unpredictable, or you are engaging an established firm that works for many clients. Price the work, not the day, wherever you can.

Take on an employee when you need the same person consistently, you want to direct how the work is done, you want to invest in training and keep the skills, or you need someone who represents your business to customers. Employment costs more in employer’s NI, holiday, pension and administration — but it buys reliability and control that subcontracting is not supposed to give you.

Be aware that once you employ anyone, employers’ liability insurance is a legal requirement, and you will need to run payroll and meet auto-enrolment duties.

Practical steps to stay on the right side

Assess each engagement, not each person. The same individual can be self-employed on one job and an employee on another.

Use HMRC’s Check Employment Status for Tax tool and keep the output. It is not infallible, but a reasoned, documented assessment is far better than nothing.

Write a contract that reflects reality — and then operate the way the contract says. A contract contradicted by daily practice is worse than useless.

Price by the job where you can. It reinforces the commercial nature of the relationship and shifts genuine risk.

Watch the drift. Arrangements that started out genuinely self-employed slide towards employment over time as people become embedded. Review long-running relationships annually.

Get advice before it becomes a problem. An hour with an accountant now is dramatically cheaper than a status enquiry later.

Building a team you can keep busy

Whichever route you take, the thing that makes it work is predictable work coming in. Nobody wants to carry an employee through a quiet spring or lose a good subbie to a contractor with a fuller diary.

Trade Pilot is free to join and only charges when a real local job lands in your inbox, with each lead sold to no more than three trades in the area. No monthly fee to cover in the slow weeks, and enough control over which leads you buy to keep the diary matched to the team you have.

FAQ

Does paying someone through CIS make them self-employed? No. CIS is a tax deduction scheme, not a status test. You can operate CIS correctly and still have misclassified someone as self-employed when they are really an employee.

Who pays if HMRC reclassifies my subcontractor? Generally the engager. You could face the PAYE and National Insurance that should have been deducted, employer’s National Insurance, interest and penalties.

Can the same person be self-employed for me and employed elsewhere? Yes. Status is assessed engagement by engagement, so somebody can hold a job and also run a genuine self-employed business alongside it.

What is the single strongest indicator of self-employment? There is no single decisive factor, but a real and unrestricted right of substitution, combined with genuine financial risk, carries a lot of weight.

Do IR35 rules apply to my small trade business? The off-payroll rules that put the assessment duty on the engager apply to medium and large private-sector businesses and to public-sector bodies. Small businesses are generally outside them, but check your position against the current thresholds rather than assuming.

What insurance do I need once I take on an employee? Employers’ liability insurance is a legal requirement once you employ staff. You will also need to run payroll and meet pension auto-enrolment duties.

Related reading: CIS deduction rates · payroll for your first employee · holiday pay and sick pay · how to register for CIS