IR35 in Construction: What Contractors and Subcontractors Should Know

In recent years, few pieces of legislation have caused more confusion or concern across the construction sector than IR35. Also known as the off-payroll working rules, IR35 determines whether a subcontractor working through a limited company is truly self-employed or actually a disguised employee in the eyes of HMRC.

As compliance enforcement increases and project risk intensifies, it’s essential that both contractors and subcontractors understand how IR35 applies in construction and what steps they must take to stay protected.

What is IR35?

IR35 is tax legislation introduced to combat “disguised employment.” It applies when a subcontractor provides services through an intermediary, typically a limited company (also called a PSC or personal service company) but their working arrangement mimics that of an employee.

If HMRC determines that the subcontractor is “inside IR35,” the business paying them may be liable for PAYE tax, National Insurance, interest, and penalties.

IR35 vs CIS: What’s the Difference?

This is a common point of confusion. While both relate to subcontractor taxation, they’re distinct schemes:

Aspect	IR35	CIS
Applies to	Ltd Co/PSC subcontractors	Sole traders and CIS-registered subcontractors
Main Risk	Disguised employment	Incorrect CIS deductions or classification
Liability Falls On	Client (for medium/large companies)	Contractor
Type of Tax Risk	PAYE and NIC reclassification	CIS misclassification, status penalties

Key takeaway: CIS does not protect against IR35. Contractors must still assess limited company subcontractors for IR35 status.

Why IR35 Matters in Construction

Construction relies heavily on subcontracted labour, including many skilled workers operating through their own limited companies. But HMRC has ramped up IR35 investigations across the sector, especially on public sector and large private projects.

Failure to assess IR35 correctly can lead to:

• Backdated tax and NIC liabilities
• Interest and penalties
• Public sector payment bans
• Supply chain disruption
• Reputational damage

Who Is Responsible for IR35 Status?

As of April 2021, responsibility for determining IR35 status lies with the end client but only if they are a medium or large business (as defined by Companies Act criteria). If the end client is a small business, the responsibility remains with the subcontractor.

In construction, this means:

• Main contractors and developers must determine IR35 status for their Ltd company subcontractors if they meet the size threshold.
• They must also provide a Status Determination Statement (SDS) and demonstrate reasonable care in how that status was reached.

What Subcontractors Need to Know

If you’re a subcontractor working through a limited company, your IR35 status depends on:

• Control – Does the client control how, when, and where you work?
• Substitution – Can you send someone else to do the job in your place?
• Mutuality of Obligation (MOO) – Is there an expectation of continued work?

If the answer to these leans toward “yes”, you may fall inside IR35, even if your contract says otherwise.

How Contractors Can Stay Compliant

To protect your business and your subcontractor supply chain, you should:

1. Identify all limited company subcontractors

2. Assess their IR35 status using professional tools (HMRC’s CEST is a start, but not foolproof)

3. Issue a Status Determination Statement (SDS) to the subcontractor and their agency (if applicable)

4. Review contracts AND working practices because HMRC assesses the reality, not just the paperwork

5. Keep evidence and audit trails for all assessments

IR35 is as much a compliance and reputational issue as it is a tax concern. Major clients, insurers, and public sector bodies are now auditing labour chains to ensure full compliance. Failure to act could jeopardise contracts, delay payments, or exclude your firm from future tenders.

How Subby Helps Firms Manage IR35 Risk

At Subby, we help construction firms navigate IR35 with confidence. Our platform and compliance team provide:

• Professional IR35 status assessments
• Guidance from ex-HMRC inspectors and tax advisors
• Status Determination Statements (SDS) generation and delivery
• Workforce audits to flag hidden risk
• Ongoing compliance tracking and digital audit trails

Whether you’re a main contractor or subcontractor, we ensure your labour supply chain is legally robust, operationally efficient, and HMRC-ready.

Get IR35 Right Before HMRC Asks

IR35 in construction is real, it’s active, and it’s enforceable. If you work with limited company subcontractors, you need to get your status checks, documentation, and processes in order now.