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by

Björgvin Vigfússon

CIS isn’t employment status: getting PAYE vs subcontractor right (CEST + risk controls)

Who this is for: UK developers, main contractors, and specialist subs who need to decide for each engagement whether a worker is an employee (PAYE/NIC) or a self-employed subcontractor (CIS) and then operate the right regime cleanly.

Why it matters: CIS is not an employment-status test. If a worker should be employed for tax, you must run PAYE/NIC and do not apply CIS. If they’re genuinely self-employed, apply CIS (verify first, then 0%/20%/30% on labour only). Getting this wrong risks back-tax, interest and penalties. GOV.UK

First principles (plain English)

  • Employees/Deemed employees → PAYE/NIC. If the engagement is employment (or caught by off-payroll working/IR35), operate PAYE. CIS does not apply to payments that are already within PAYE. GOV.UK
  • Genuinely self-employed subs → CIS. Register/verify subs and apply CIS to labour (exclude materials/eligible plant), issue Payment & Deduction Statements, and file CIS300 by the 19th. (Employees do not register for CIS.) GOV.UK

Quick sense-check: The GOV.UK “Employment status” overview makes clear that people can be self-employed or employees/workers, and CIS is a separate scheme for self-employed construction engagements. GOV.UK

How to decide status (your 3-step process)

1) Run CEST on the specific engagement

Use HMRC’s Check Employment Status for Tax (CEST) tool for a decision you can file with your job record. Re-run if the working practices change (e.g., control, substitution, financial risk). GOV.UK

2) Capture evidence & draft the contract to match reality

  • Keep the CEST PDF, scope of works, proof of substitution rights (if any), insurances, and rate/price basis.
  • Make sure site rules and supervision reflect the decision (e.g., if “self-employed”, avoid employee-like control/obligations that contradict CEST).

3) Operate the right regime—and only one

When both regimes appear to collide (they don’t)

If an engagement is within off-payroll working (Chapter 10) or otherwise PAYE, you do not consider CIS for those payments. If off-payroll does not apply, then consider whether CIS withholding is needed. Keep the status chain clear in your file notes. GOV.UK

Worked mini-scenarios (so you can judge your risk fast)

A) Labour-only bricklayer on site, closely directed → PAYE

CEST indicates employed: hours set by you, close supervision, no substitution, you provide most equipment. Outcome: employee for tax → put on PAYE. Do not run CIS on these payments. GOV.UK

B) Specialist roofer on fixed-price package → CIS

CEST indicates self-employed: owns tools, sets their own hours within H&S, bears rectification risk, can substitute, multiple clients. Outcome: self-employed → verify and pay under CIS (labour deduction only). GOV.UK

C) PSC contractor assessed as inside IR35 → PAYE (off-payroll)

You determine “inside” under Chapter 10. Outcome: pay the deemed direct payment with PAYE/NIC; CIS not considered for those payments. GOV.UK

Invoicing & VAT interactions you must get right

  • CIS base = labour only. Materials/eligible plant/fuel are excluded from the deduction base. → CIS invoice anatomy: labour vs materials GOV.UK
  • VAT Domestic Reverse Charge (DRC) may still apply on construction services between VAT-registered businesses (unless an end user/intermediary supplier has notified in writing). When DRC applies, no VAT is charged on the invoice and the customer reverse-charges VAT on the whole supply—while CIS still applies to labour only. → CIS vs VAT Domestic Reverse Charge

Month-end controls that keep you out of trouble

  • Status first, then CIS: attach CEST PDFs and contract extracts to the vendor/job file. GOV.UK
  • Verification & rate: before first payment, and re-verify if a sub hasn’t appeared on your CIS returns in the current or previous 2 tax years. → Subcontractor verification GOV.UK
  • Statements & return: issue Payment & Deduction Statements within 14 days of month-end (by the 19th), file CIS300 by the 19th, pay by the 22nd if electronic. → CIS300 & Payment/Deduction Statements GOV.UK
  • Software setup: lock codes/templates so labour lines carry CIS, materials don’t; DRC wording is correct; and PDS ↔ CIS300 ↔ bank reconcile. → CIS returns & statements in Xero/QuickBooks/Sage

FAQ (practical & defendable)

Is using CIS evidence that someone is self-employed?
No. Status comes first. If the facts point to employment (or Chapter 10), run PAYE; CIS does not apply to those payments. GOV.UK

Does HMRC stand by CEST decisions?
HMRC says you can use CEST to determine status; keep accurate answers and evidence, and re-test if facts change. Save the output with the job file. GOV.UK

What are the risks if we get status wrong?
PAYE/NIC arrears plus penalties/interest. PAYE late-payment penalties start at 5% after 30 days overdue, with further 5% charges at 6 and 12 months. Errors can also attract inaccuracy penalties depending on behaviour. GOV.UK

We sometimes use employment agencies. Does CIS apply?
If a worker is employed by an agency (or the off-payroll rules make you the fee-payer), those payments are generally through PAYE, so CIS is not considered. Check the facts and CEST as needed. GOV.UK

Related internal guides

Source notes (GOV.UK)

  • CEST: Check Employment Status for Tax (guidance & updates). GOV.UK
  • CIS 340 — guide for contractors and subcontractors (scheme rules; labour-only base; monthly returns). GOV.UK
  • CIS: subcontractor guidance (employees don’t register for CIS). GOV.UK
  • Employment Status Manual (ESM10004A) — when PAYE/off-payroll applies, CIS is not considered. GOV.UK
  • PAYE late payment penalties (5% at 30 days, then further 5% at 6 and 12 months). GOV.UK
  • Employment status overview (self-employed/contractor vs employee/worker). GOV.UK