Ever wondered what a subcontractor is? Or are you just hoping to find out how subcontracting works? Either way, you’ve come to the right place.

In this no-nonsense guide to subcontracting, we’ll provide you with the answers you’re looking for.

What is a subcontractor?

Subcontractors carry out work for contractors to help them complete a project for the client. As a subcontractor, you don’t hold a contract with the end customer but the contractor, who is your hirer or client. They ‘sub’ work out to you. Ever heard the term or been referred to as a ‘subbie’? Well, now you know why.

There are a few reasons why it’s important that you know where you stand in the contractual chain – from knowing who to report to, submit your timesheet to, and, if you’re a CIS worker, the party managing your tax.

How does subcontracting work?

It’s usually quite straightforward. Here’s how subcontracting might work in practice:

Fred’s Building Company (the contractor) is engaged by Homebuilders Ltd (the client) to build a dozen homes. Fred’s Building Company needs help doing this, as he doesn’t have enough permanent workers to complete the work in the time frame required, and so brings in Jeff (the subcontractor) as an extra pair of hands.

Why subcontract?

Through the eyes of a subcontractor, there are lots of reasons people choose to work this way:

• Control – subcontractors are self-employed. So as your own boss, you can enjoy all the benefits that come with self-employment
• No strings – unlike employment, subcontractors aren’t tied down to work with the company for long periods of time. Not enjoying your current project? Simply find another, subject to your contract of course
• Demand – with record skills shortages in the UK, demand for subcontractors – who offer contractors specialist skills and flexibility at short notice – is sky-high
• Opportunities- the contractor may have more client contacts, and so may be able to provide more opportunities for work
• Stress-free tax – subcontractors in the construction industry don’t need to worry about their tax obligations when working under the Construction Industry Scheme (CIS). Your contractor will take care of this.

Subcontracting and taxes

Generally speaking, there are two ways to go about tax as a subcontractor.

The Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) helps make sure self-employed construction workers – including subcontractors – organise and pay the right amount of tax.

Under CIS, an employer (your contractor) will deduct tax (usually of 20% or 30%) from the labour element of your pay, and pay this over to the HMRC on your behalf to cover your income tax and National Insurance contributions. This will be calculated as part of your self-assessment tax return at the end of each year.

This means that you won’t have to worry about putting funds to one side to cover your taxes due. However, the CIS scheme doesn’t take into account expenses you might have incurred – whether travel, accommodation, uniform, and even mileage – which could be used to reduce the tax you owe. In this scenario, a subcontractor may actually be due a tax refund.

To learn more, take a look at our guide to the Construction Industry Scheme.

For those not working through the CIS scheme, you will paid the ‘Gross’ amount of monies owed to you by your contractor, and so you just need to put money to one side throughout the year, to ensure that you have enough to cover your taxes when due.

Do it yourself (or through an accountant)

Whether they work in the construction industry or not, subcontractors can organise their own tax affairs, working either as sole traders or via their own limited company. In this case, subcontractors often choose to engage accountants to help manage their tax.

At the end of the day, the route you decide to take might depend on how each contractor you work for likes to operate, along with your own priorities and preferences.

The difference between contractor and subcontractor

The lines between a contractor and subcontractor can sometimes blur, so we’ll run through some key differences.

A contractor:

• Deals with the end-client/customer directly (or is at least one step closer to them in the supply chain)
• Is responsible for completion of the entire project, including the work carried out by the subcontractor, materials needed for the job and more

A subcontractor:

• Reports to the contractor (their client) and doesn’t tend to deal directly with the end-client/customer
• Is usually hired to complete one specific aspect of a bigger job, such as electrical work or floor laying on a house build

The difference between subcontractor and employee

When it comes to employment law, subcontractors and employees are poles apart.

A subcontractor:

• Works on a temporary/project by project basis
• Is self-employed and pay tax via the self-assessment tax return, or through their limited company
• As a self-employed worker, can accept/reject jobs as they please

An employee:

• Works under a contract of employment, regardless of whether they are full or part time
• Is paid under PAYE (Pay As You Earn), meaning their employer manages their tax obligations
• Is expected to carry out work handed to them by their employer
• Is not able to claim the same types of expenditure that a self-employed person can

Here to help

Now that you have a better idea of what a subcontractor is, the way they work, along with the tax obligations and options available, you should now be in a strong position to decide if it’s right for you.

If you’ve worked under CIS and want to find out if you’re due a tax rebate, please get in touch.