HMRC says my subcontractors are employees, what happens?

This is one of the most consequential findings HMRC can make in a construction sector check. If someone paid as a CIS subcontractor is reclassified as an employee, the tax treatment of every payment to them changes.

Instead of a CIS deduction, HMRC treats the payments as employment income, meaning PAYE and National Insurance should have been operated. Your company can be assessed for the shortfall going back several tax years.

The decision does not turn on what your contract says; it turns on how the relationship actually worked day to day.

There is no single statutory definition of “employee” for this purpose. HMRC and tribunals apply tests developed through case law, looking at control over how, when and where work is done, whether the worker can send a substitute, and whether there is mutuality of obligation between engagements.

The Construction Industry Scheme itself is set out in Chapter 3 Part 3 Finance Act 2004 (opens in a new tab), but CIS only applies correctly where the underlying relationship is genuinely self-employment, not disguised employment.

Where HMRC concludes the relationship was actually employment, it can raise assessments for unpaid PAYE and National Insurance, using its normal enquiry and assessment powers, with time limits running from the tax year in question.

The company, as engager, usually carries the primary liability for unpaid PAYE, even though the worker also has personal tax obligations that need reconciling.

Review how your subcontractor arrangements actually operate: do they use their own tools, control their hours, and take on other clients? Genuine substitution rights matter more than a clause in a contract that is never exercised in practice.

If HMRC opens a status check, gather evidence of independence: invoices, other clients, equipment ownership, and any instances of a genuine substitute being sent.

Consider reviewing your wider workforce arrangements now rather than waiting for a check, since a finding against one subcontractor often leads HMRC to look at everyone engaged on similar terms.

A successful reclassification can mean years of backdated PAYE and employer's National Insurance, plus interest and potentially a penalty for an inaccurate return.

You may also need to correct CIS records for the individuals involved, which adds administrative cost and delay elsewhere in your accounts.

Defending a status challenge properly needs specialist input early. Growth plan clients get free tax investigation insurance included, covering professional fees for this kind of enquiry — see /fees.

Do not rely on a written contract that says “self-employed” if the day-to-day relationship looks like employment; HMRC and tribunals look past the label.

Do not treat every worker on the same terms without checking each engagement individually; status is assessed person by person.

Do not ignore a status enquiry into one subcontractor, assuming it will not spread to the rest of your workforce.