CIS vs IR35: Tax Risks for UK Construction Subcontractors

Many construction subcontractors assume CIS registration protects them from IR35 — it doesn't. Learn how the two schemes differ, what HMRC actually looks for, and what you can do now to protect your position before the 2026 threshold changes take effect.

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CIS Tax · 5 min read ·

CIS vs IR35: Tax Risks for UK Construction Subcontractors
CIS vs IR35: Key Tax Risks for UK Construction Subcontractors
Tax Guidance  ·  Construction Industry  ·  UK

CIS vs IR35: Why High-Earning Construction Subcontractors Need to Understand Both

Being registered under CIS does not protect you from IR35. Many experienced specialists assume otherwise — and that assumption can prove extremely costly.

For limited company contractors & PSCs Updated for 2026–27 thresholds

The Construction Industry Scheme (CIS) and IR35 are two separate pieces of legislation that serve entirely different purposes. CIS is a tax deduction scheme governing how payments are made within the construction industry. IR35 — formally known as the off-payroll working rules — determines whether you are genuinely self-employed for tax purposes, or whether you should be treated as a disguised employee.

The two operate independently. IR35 can still apply even when CIS deductions are being made, and HMRC has been increasingly active in pursuing status enquiries across the trades.

The Core Difference: Deduction vs Employment Status

CIS ensures HMRC receives tax on payments to subcontractors throughout the year — it says nothing about your employment status. IR35, by contrast, is anti-avoidance legislation designed to ensure that workers who function like employees pay comparable levels of Income Tax and National Insurance Contributions, even when operating through a limited company or personal service company (PSC).

Financial comparison: a typical £80,000 earner

Feature Outside IR35 Genuine subcontractor Inside IR35 Disguised employee
Tax Structure Corporation tax on profits, plus dividends and salary. Full use of legitimate business expenses. Subject to PAYE Income Tax and both employee and employer National Insurance.
Take-Home Pay Usually optimised through dividends and allowable expenses. Significantly lower due to higher effective tax and NICs.
HMRC Risk Low when working practices and contracts genuinely align with self-employment. Higher exposure to enquiries, backdated liabilities, interest and penalties if status is challenged.
Benefits & Autonomy Greater flexibility and commercial independence. Few additional employment rights, despite a significantly higher tax burden.

Common Misconceptions

Myths that could cost you
  • ✕
    "I have a CIS card, so I'm self-employed" — CIS registration does not determine employment status for tax purposes. These are separate questions.
  • ✕
    "My contract says I'm a subcontractor, so I'm safe" — HMRC looks at the actual working relationship — the facts and practices on the ground — not just contract wording.
  • ✕
    "The main contractor or agency handles everything" — You remain responsible for your own tax position, especially when working for smaller clients.

Key Factors HMRC Considers for Employment Status

HMRC assesses whether you would be regarded as an employee if engaged directly. The five principal indicators are:

01
Right of Substitution
Can you send a suitably qualified replacement without the client's approval being unreasonably withheld?
02
Control
How much control does the client or site manager have over the how, when, and where of your work?
03
Mutuality of Obligation
Is the client obliged to offer work, and are you obliged to accept it?
04
Financial Risk
Do you bear genuine financial risk — for example, by supplying your own equipment or rectifying defects at your own cost?
05
Integration
Are you embedded in the client's organisation — using their email, attending staff meetings, or appearing on their org chart?

Practical Checklist to Strengthen Your Position

  1. 1 Ensure your contract contains a genuine and practical right of substitution clause — and that it reflects real practice.
  2. 2 Avoid becoming overly integrated into the client's day-to-day operations and management structure.
  3. 3 Maintain your own business insurance, specialist tools or equipment, and a separate business bank account.
  4. 4 Document evidence of independence: rate negotiations, instances where you declined work, project variations, and so on.
  5. 5 If working for a medium or large client, request a Status Determination Statement (SDS) and review it carefully.
  6. 6 Use HMRC's free Check Employment Status for Tax (CEST) tool as a starting point — but for borderline cases, seek professional advice, as CEST has known limitations.
Important update  ·  2026–2027

From 6 April 2026, the financial thresholds defining a "small" company are increasing — to a turnover of £15m or less and a balance sheet total of £7.5m or less (with the employee headcount ceiling remaining at 50). As a result, many clients who are currently classed as medium or large may become "small" for IR35 purposes. When the client is small, the responsibility for determining IR35 status falls back on your limited company. Now is the time to review your client base and prepare accordingly.

Don't wait for an HMRC enquiry.

If you work long-term for the same client or clients on high day rates through a limited company, it is prudent to review your arrangements proactively. A professional IR35 status review — one that examines both your contract and your actual working practices — can provide clarity and peace of mind.

Aligning your contracts and daily practices with self-employment principles now is far easier, and usually far cheaper, than addressing a compliance issue after the fact.