What’s the Difference Between Contractors and Subcontractors?

The Construction Industry Scheme, commonly referred to as CIS, is an essential tax programme that almost everyone who works in the construction industry must be registered with.

The scheme is the main way that tax is paid across the construction sector, and it is imperative that everyone who works within the industry is familiar with how it works and the things they need to do to ensure compliance.

One of the biggest mistakes people make when completing their admin or paperwork in relation to the scheme is incorrectly classifying workers.

As part of the scheme, it is necessary that contractors and subcontractors are properly registered and classified.

Even innocent mistakes may face a reclassification risk, which can be hugely financially damaging to a business.

In order to best protect contractors and subcontractors and ensure CIS compliance, in this article the team here at Contract Wise will explain the key differences between contractors and subcontractors.

Read on to learn more…

What is a contractor?

A contractor is a professional who is tasked with paying subcontractors for carrying out specific construction tasks.

The scope and role of a contractor are likely to vary, and in some instances, they will have a wide skillset. In others, they may have more niche specialisms and a few select skills. However, a contractor will more often than not try to display a broad range of skills in order to be more flexible and maximise the amount of work they can assist with.

Contractors can be self-employed, work as sole traders or run their own company, and in any case, they may be called on for a one-off job or hired for a longer period of time. For example, sometimes contractors are brought on board a project just for a few hours and in other instances it’ll be for the entire duration of a job.

In regards to the Construction Industry Scheme, every contractor must be registered. Any contractor that is not registered with CIS will be breaking the law and will likely face legal consequences if caught.

If you are a contractor that pays any subcontractors for any work you will need to register. Even if the business you operate does not work in construction if it has spent more than £3million in the last year on works or renovations you must still register with CIS.

What is a principal contractor?

In addition to standard contractors, it is also important to understand what a principal contractor is.

A principal contractor will usually be appointed if there is more than one contractor engaged with a project. The client will select one of the contractors to act as the ‘principal’ contractor and it will be their responsibility to oversee every phase and aspect of the work.

This includes:

• Planning, managing and coordinating the entire project

• Taking into account all health and safety considerations

• Liaising with clients and designers to ensure everything is running smoothly

• Creating written plans and reports that are regularly reviewed and assessed to ensure the project is on track

• Regularly checking in and consulting with workers regarding their health, safety and other concerns

• Ensure suitable welfare facilities are provided for the duration of the project

• Ensure all workers have the skills, knowledge and experience to carry out their work safely and to a high standard

• Make sure everyone working understands the specific site instructions

• Take the relevant steps to prevent unauthorised access to a site

Just like with standard contractors, it is always necessary for a principal contractor to register with CIS.

What is a subcontractor?

Now, let’s take a look at subcontractors.

A subcontractor is someone that is paid by the contractor to carry out the work.

Typically, subcontractors are experts or specialists in a certain field and will be brought on board due to their specific expertise in an area. In most instances, subcontractors will work exclusively for the project’s contractors as opposed to the project manager or owner of a site or project.

In some cases, a subcontractor may have an ongoing relationship with certain contractors that sees them work together again and again on various projects. Alternatively, they may be on the open market and open to all kinds of work.

While many subcontractors offer just one type of service, they will usually be able to carry out the work to a higher standard due to their expertise in their field.

Some common examples of subcontractors include:

• Plumbers

• Electricians

• Groundworkers

• Engineers

• Plasterers

• Carpenters

• Stonemasons

• And more

Just like with contractors, a subcontractor may work for the duration of a project or just be present at the site for a set period of time until their role has been completed. The flexibility of many projects means it is not unusual for subcontractors to sometimes appear for just hours at a time.

Unlike contractors, it is not a legal requirement for subcontractors to register for the Construction Industry Scheme. If they prefer, they can complete a self-assessment form to pay their tax at a later date.

However, even though it is not mandatory, in most cases it is in the subcontractors' interest to do so. Those who are registered will have 20% of their earnings deducted by the scheme but this is increased to 30% for those who are not registered.

Therefore, unregistered subcontractors will be paid 10% more than registered ones.

Contractors vs subcontractors - what’s the difference?

If you’re due to conduct a payroll audit, you should always check that you have registered all contractors and subcontractors correctly. Failure to do so could result in an HMRC reclassification which will be costly.

There are several differences between the two roles which can help you define which is which.

First, a contractor will always set the terms of their own contractors including the fees involved and where the work is to be completed. Whereas subcontractors will be provided with this information.

Contractors also often have the freedom to choose their own hours and will inform the subcontractors of this information.

But, perhaps the biggest difference of all, is that contractors are hired to perform specific tasks but subcontractors are hired to provide key services. This means that subcontractors are usually brought on board when there is a skill shortage or gap in a project that needs to be plugged. Subcontractors also tend to specialise in one area whereas contractors may have more general skills.

While a contractor will be responsible for the scope of the entire project, the remit of a subcontractor will be solely for their own tasks. Once these tasks have been completed, the subcontractor will usually move on.

In terms of the Construction Industry Scheme, the main difference is that contractors must register by law while subcontractors have a choice (although it is still in their interest to register).

How to register for the Construction Industry Scheme

Now, let’s explain how to register for CIS.

Registering for CIS as a contractor

There are two ways you can register for the scheme as a contractor.

When you have registered for PAYE, there is a box that will ask ‘will you be engaging any subcontractors in the construction industry?’ if you tick this box then you will be automatically CIS registered without having to do anything else.

However, if you have previously registered for PAYE but failed to do this, then you will have to contact CIS to inform them that you now wish to register as a contractor. There is a helpline you can use to do this.

Sometimes, you may have started as a subcontractor and later become a contractor.

In these instances, you will already have a UTR number and a Government Gateway account. Log in to this account and on this platform, you will then be able to register as an employer. Even if you will not directly employ anyone and will only use subcontractors you will still need to register as one.

Then, you will be given a PAYE number which you can use to register for the scheme by calling the helpline or following the online instructions.

Registering for CIS as a subcontractor

As a subcontractor, the first thing you need to do is sign up online for a Government Gateway account. This is extremely straightforward, and all you will need is your Unique Taxpayer Reference (UTR) number that you use to pay tax, your national insurance number and other personal details.

If you prefer to speak to someone directly, you can use the dedicated CIS helpline which will guide you through the process. You can also register by post by downloading the forms online.

Once you have registered for the scheme, before any work you then carry out for a contractor you should make them aware you are a CIS member and provide them with your UTR and national insurance number. They’ll be able to confirm your CIS status by using this information.

Here at Contract Wise, we understand that tax and the Construction Industry Scheme can be confusing and difficult to understand. This is why we provide our customers with a range of services including CIS compliance services to make sure you and your employees are always protected.

Contact our team for more information.