A construction worker is paid under the Construction Industry Scheme only if the engagement is genuinely self employed; if the terms amount to a contract of employment, the contractor must run PAYE and pay employer National Insurance instead. The decision is the contractor’s, it is made engagement by engagement under the ordinary case law tests, and the worker’s CIS registration does not settle it.

Who decides whether a worker goes through CIS or PAYE?

The contractor does. HMRC’s Construction Industry Scheme Reform Manual at CISR11060 says the scheme applies to workers who, for particular contracts, are self employed and not employees subject to PAYE, that employment status depends on general law, and that it is for the contractor to decide this when engaging the subcontractor. The same page makes a point many site managers miss: the fact that a worker is already registered for CIS, whether for gross payment or payment under deduction, is irrelevant to the question. It is the terms of the particular engagement that decide whether payments fall within the scheme or within PAYE.

The legislation builds this in. Section 57(2) of the Finance Act 2004 defines a “construction contract” for CIS as a contract relating to construction operations “which is not a contract of employment”. If the contract is one of employment, there is no construction contract, CIS has nothing to bite on and the worker must be taxed through the payroll. Our guide to the employment status tests explains the general case law; this page covers how HMRC applies it on site.

What does HMRC look for in a construction engagement?

The Employment Status Manual has a section dedicated to construction at ESM4320 to ESM4326. It is clear that status in construction is decided by the same case law tests as any other occupation, but it describes the two ends of the spectrum.

At one end, ESM4324 describes a general labourer working full time or nearly full time for a single contractor over a long period, where these features are often present:

  • payment by the hour, day, week or month;
  • extensive control over what, when, where and how the work is done;
  • personal service is required;
  • apart from small tools, the engager supplies the materials and equipment.

HMRC says such a worker is likely to be an employee, and that part time workers are judged the same way. At the other end, an engagement that is task based, where the worker is responsible for completing a specific parcel of work, provides significant equipment or materials, or faces real financial risk, points strongly to self employment. HMRC’s own example is a plumber who supplies the pipework, is paid for a specific piece of work and must put defective work right at his own cost.

ESM4324 also warns against confusing engagement “by the task” with engagement “for the duration of a project”. A worker paid by the hour or day who is controlled like an employee until the project finishes is just as likely to be an employee, simply under a contract of indefinite length. Being paid by the piece is not conclusive either, because many employees are paid that way.

Can a short term or casual worker be an employee?

Yes. ESM4325 rejects the argument that casual or short term workers are always self employed. It cites Lee Ting Sang v Chung Chi Keung, where a stonemason who worked for the engager only occasionally was held to be an employee, and Lane v Shire Roofing Company (Oxford) Ltd, summarised at ESM7165, where a roofer engaged for a single porch job was held to be an employee for that job because it was the roofing firm’s business, not his. HMRC adds that a student taken on as a labourer for a few weeks of the summer, or a labourer under detailed control, is likely to be employed.

ESM4325 lists what tends to support self employment on a short engagement: substantial equipment supplied by the worker, such as a digger driver bringing his own digger; genuine financial risk, such as correcting defective work at his own cost or buying significant materials; or a skilled worker engaged and paid to complete a specific task who can show either an existing business in a related field or a pattern of short contracts for different engagers run in a businesslike way.

What about gangs, agencies and umbrella companies?

Labour supply arrangements change who has to operate which system.

  • Gangs. Under CISR13060, if the contractor pays a gang leader who shares out the money, the contractor deals with one subcontractor and the gang leader becomes responsible for the gang members. If the contractor makes separate agreements with, or pays, individual gang members, each one must be treated as a separate subcontractor or employee.
  • Agencies. CISR12040 says a labour agency supplying workers is usually obliged under the agency rules to operate PAYE. Where the off payroll working rules create a deemed employment, CIS does not apply, because those rules take priority under section 60(3A) of the Finance Act 2004. Our page on the agency legislation covers the reporting side.
  • Umbrella companies. From 6 April 2026, Chapter 11 of Part 2 of ITEPA 2003 makes the agency that contracts with the client, or the client itself where there is no agency, jointly and severally liable with an umbrella company for PAYE the umbrella fails to pay on qualifying payments (ESM2410 and ESM2420).

What happens if a contractor treats an employee as a subcontractor?

The risks are larger than the tax on a single month.

  • A false declaration. Every monthly CIS return includes a declaration that the subcontractors listed are not employees. GOV.UK warns that a contractor can be charged a penalty of up to £3,000 for giving the wrong employment status for a subcontractor on the return.
  • PAYE and National Insurance arrears. ESM4326 tells status inspectors to support a conclusion that a construction worker is an employee with Regulation 80 determinations for PAYE and formal National Insurance decisions. Between them these recover income tax and Class 1 contributions, including the employer’s share, which no CIS deduction ever covered because CIS deductions are advance payments towards the subcontractor’s own tax and National Insurance.
  • History of enforcement. ESM4320 records that HMRC and the Contributions Agency told contractors to finish reviewing worker status by 5 April 1997, and says that in the overwhelming majority of cases contractors have no excuse for failing to establish status correctly. That affects how behaviour is viewed when penalties are considered.
  • Employment rights. GOV.UK notes that status for tax and status for employment law can differ, and that employers should check both. A worker treated as a subcontractor may still be owed holiday pay or other rights.

Where labour is supplied through a chain, the 2026 rules on payments connected with deliberate PAYE failures can also apply; see CIS changes from April 2026.

What does this look like in practice?

Illustration only. A groundworks contractor takes on two people for a six month housing project.

Feature Worker A Worker B
Pay Day rate, paid weekly Fixed price for drainage runs, invoiced per run
Control Told each morning which tasks to do and how Works to the drawings, chooses his own methods and hours
Equipment Hand tools only; contractor supplies plant Own mini digger and pipe laser
Risk Paid for every day worked Puts failed runs right at his own cost
Other work Works only for this contractor Prices jobs for other builders

Both may be registered for CIS, but that does not decide anything. Worker A matches the long term labourer HMRC describes at ESM4324 and should be on the payroll. Worker B shows equipment, financial risk and a business of his own, so paying him under CIS with the deduction rate HMRC gives on verification is defensible. The contractor should keep a note of the facts relied on for each.

How should a contractor check and record status?

GOV.UK tells contractors to check whether they should employ a person instead of subcontracting before they register their first subcontractor. CISR11060 points contractors to HMRC’s factsheet on whether workers are employed or self employed, and HMRC’s online tool can be used for each engagement; our guide to the Check Employment Status for Tax tool explains how to use it and keep the result. In practice a sound file holds the written terms, a note of how the work is actually done, who supplies plant and materials, and who bears the cost of defects, reviewed whenever the working pattern changes.

What mistakes come up most often?

  • Relying on the worker’s CIS registration or a “self employed” label in the contract, when CISR11060 says registration is irrelevant and the facts decide.
  • Assuming a fixed term or project based engagement is self employed when the worker is paid by time and controlled like staff.
  • Paying gang members individually while treating only the gang leader as a subcontractor.
  • Running CIS on labour supplied by an agency where the agency rules or off payroll rules require PAYE.
  • Reviewing status once at the start and never again, even after a worker has been on the same site full time for a year.

If HMRC opens an employer compliance check, it will usually test a sample of workers paid under CIS against these points. For how the scheme works more generally, see our overview of the Construction Industry Scheme.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.