What’s the Difference Between Bona Fide Subcontractors and Labour Only Subcontractors?

In the construction industry, subcontractors play a vital role in the success and delivery of projects of all sizes. From large commercial builds to small residential developments, subcontractors offer the expertise and manpower necessary to carry out a wide range of specialist tasks to the highest standards.

However, not all subcontractors are the same and understanding the difference between bona fide subcontractors and labour-only subcontractors is crucial if you’re to fulfil your Construction Industry Scheme (CIS) obligations.

Getting it wrong can have serious consequences and will impact how you handle tax deductions and insurance. Here at Contractwise, we are experts in CIS and offer a range of services to protect contractors and subcontractors. This includes payroll audits that remove HMRC reclassification risks and ensure CIS compliance.

In this blog, we’ll break down the different types of subcontractors and what this means for your business.

What is a bona fide subcontractor?

A bona fide subcontractor is a self-employed professional or a business that operates independently. They are hired to complete a specific task or aspect of a project, but will do so under their own direction and not at the instruction of a contractor. Unlike an employee, a bona fide subcontractor controls how, when and with whom they work. They’ll typically supply all their own tools and materials, are responsible for their own health and safety and will invoice their own job once it is complete.

In simple terms, bona fide subcontractors are truly independent and work like a small business within a larger project structure.

How are bona fide subcontractors paid?

Bona fide subcontractors are paid on a per-project basis rather than being paid monthly or weekly like employees or labour-only subcontractors. They will also not receive any sick pay, holiday pay or pensions from the main contractor. Instead, a price is agreed for their services, and an invoice is submitted once their work is complete.

Under CIS, a bona fide subcontractor has the choice to be registered with the contractor, typically deducting 20% tax from their payment (or 30% if they choose to be unregistered. If the subcontractor holds gross payment status, no deductions will be made.

What insurance do bona fide subcontractors need?

As they are independent, bona fide subcontractors are responsible for their own insurance. In particular, they should have public liability insurance in place before you agree to work with them.

Main contractors should always check that a bona fide subcontractor’s insurance is adequate and up-to-date, as failing to do so can expose you to serious financial risk if a claim is made.

What is a labour-only subcontractor?

In contrast, a labour-only subcontractor is more like a temporary employee. Although they might be self-employed, labour-only subcontractors work under the supervision and control of the main contractor. They use the contractor’s materials, tools and equipment and will follow their direction in terms of working hours and what tasks to complete.

In the eyes of HMRC and insurers, labour-only subcontractors are not independent. As a result, the responsibilities of the contractor are far greater.

How are labour-only subcontractors paid?

A labour-only subcontractor is usually paid weekly or even on a daily basis. While they may submit timesheets or invoices, the process is more aligned with that of an employee. Perhaps most importantly, they do not bear any financial risk - if something goes wrong, the responsibility lies solely with the contractor.

Under CIS, tax still needs to be deducted, but the way you handle labour-only subcontractors often brings employment status into question, which could result in further liabilities for National Insurance contributions and other employee entitlements.

What insurance do labour-only subcontractors need?

Unlike bona fide subcontractors, labour-only subcontractors are usually covered by the main contractor’s insurance. This includes public liability and employers’ liability insurance.

Because the main contractor effectively supervises and controls labour-only subcontractors, insurers and HMRC tend to view them as employees - even if paperwork says otherwise. This means the contractor is liable for any claims or incidents involving them on-site.

How do subcontractors impact your insurance?

Whether you’re working with bona fide or labour-only subcontractors, it’s crucial to understand how their status affects your insurance requirements. Let’s take a closer look:

• Bona fide subcontractors: They are not automatically covered under your insurance, and they must have their own policies in place. You should request evidence of cover before work begins. If they don’t have any valid insurance and something goes wrong, you may be liable.
• Labour only subcontractors: They are treated like employees by insurers. This means you must include them in your employer’s liability insurance cover and are responsible for any claims resulting from their actions.

Neglecting these distinctions can have serious financial consequences. An incident involving an uninsured or misclassified subcontractor could leave you exposed to claims, fines and reputational damage.

How do subcontractors impact your insurance?

Whether you’re working with bona fide or labour-only subcontractors, it’s crucial to understand how their status affects your insurance requirements. Let’s take a closer look:

• Bona fide subcontractors: They are not automatically covered under your insurance, and they must have their own policies in place. You should request evidence of cover before work begins. If they don’t have any valid insurance and something goes wrong, you may be liable.

• Labour only subcontractors: They are treated like employees by insurers. This means you must include them in your employer’s liability insurance cover and are responsible for any claims resulting from their actions.

Neglecting these distinctions can have serious financial consequences. An incident involving an uninsured or misclassified subcontractor could leave you exposed to claims, fines and reputational damage.

How to tell which subcontractor is which?

Misclassifying subcontractors is one of the most common mistakes in construction payroll and CIS management. However, there are a few key ways you can determine whether someone is a bona fide or a labour-only subcontractor.

This includes:

How they are paid

Bona fide subcontractors are paid at the end of a project or per a pre-agreed milestone. They will produce their own invoices.

Labour-only subcontractors are usually paid weekly or daily in a similar manner to construction employees.

Job flexibility

Bona fide subcontractors can pick and choose who they work for, and will often work for multiple clients at once. In contrast, labour-only subcontractors will usually only work for one main contractor for the duration of a job.

Responsibilities for costs

A bona fide subcontractor will bear the financial risk for any delays or errors that impact the project. However, labour-only subcontractors do not bear any financial risk, and the main contractor is responsible for all of the costs.

Tools and materials

Bona fide subcontractors usually supply all of their own tools and materials for the project.

A labour-only subcontractor will use tools that are provided by the contractor.

Insurance

Bona fide subcontractors must have their own insurance cover, and no work should be carried out until this has been proven.

On the other hand, labour-only subcontractors are covered under the contractor’s insurance, and any issues will need to be resolved by the contractor.

Independence

Bona fide subcontractors are fully independent and will manage the project themselves. They also have the power to hire others and substitute workers as they see fit.

This is not the case with labour-only subcontractors who are instructed by the main contractor and cannot delegate or make any major decisions.

Business integration

Bona fide subcontractors are completely separate from a contractor’s business. Whereas a labour-only subcontractor is integrated into a contractor’s team and treated as an employee.

Using this list can help you accurately assess a subcontractor’s status and ensure you’re meeting your legal, tax and insurance responsibilities. If you’re still unsure, the team here at Contractwise is here to advise.

Subcontractors and CIS

The Construction Industry Scheme (CIS) applies to both types of subcontractors, but how it applies depends on their classification.

• Bona fide subcontractors: These are the ideal candidates for CIS. They are registered as self-employed or as a limited company, and you deduct tax from their payments (unless they have gross payment status). You must verify them with HMRC first and submit monthly CIS returns that detail their payments and deductions.

• Labour-only subcontractors: These are a bit more complicated. If HMRC believes they are effectively employees, you could be liable for PAYE, National Insurance and even face misclassification penalties. While you still deduct CIS tax, you should be careful not to misrepresent their employment status.

Getting these classifications right is vital. Failing to comply with CIS rules can lead to fines, interest on unpaid taxes and damage to your company’s reputation.

Why subcontractor classification matters

Understanding the difference between a bona fide and labour-only subcontractor isn’t just a box-ticking exercise. It’s a fundamental part of managing risk, ensuring compliance and keeping your operations running smoothly.

• Classifying a worker incorrectly can land you in trouble with HMRC

• Failing to arrange proper insurance can lead to expensive claims

• Poor CIS administration can bring fines, audits and lengthy project delays

At Contractwise, we specialise in all aspects of CIS payroll, providing a range of services for construction companies in the UK. Whether you’re working with labour-only subcontractors, bona fide subcontractors or a mix of both, we help you stay compliant and efficient.

As your expert partner in CIS payroll, we’ll handle every aspect of CIS compliance. We will handle everything from assisting with subcontractor verification to carrying out payroll audits to ensure everything is in order. We can make sure you’re always on the right side of HMRC and never have to worry about fines or damages to your business.

Whether you need help identifying subcontractor status, managing complex pay structures or simply want to reduce your admin time, we’re here to help you. Contact us today to streamline the CIS process.