Subbies or Employees? How to Get the Subcontractor Decision Right Before the Fair Work Agency Comes Knocking

Why this decision suddenly matters

The subbie question used to be a quiet risk. In 2026 it became a loud one.

For years the subbie decision sat in the background. You took someone on, they invoiced you, you deducted CIS, and everyone got on with the job. If HMRC ever came sniffing, it was usually a slow letter and a long conversation with your accountant.

That world is changing, and fast. From 7 April 2026 there is a new body called the Fair Work Agency, set up under the Employment Rights Act 2025. It pulls together enforcement that used to be scattered across HMRC, the Employment Agency Standards Inspectorate and the Gangmasters and Labour Abuse Authority into one place. It can inspect workplaces, demand your records and bring a tribunal claim on a worker's behalf. That last one matters. A person who feels they were treated as staff but paid as a subbie no longer has to fight you alone.

At the same time, HMRC has sharpened its own tools. From 6 April 2026 it can act against businesses anywhere in the supply chain that knew, or should have known, that payments were tied up with false self-employment. Lose your gross payment status through this and the ban on reapplying jumps from twelve months to five years. Two separate bodies, both looking at the same question, both with more teeth than they had this time last year.

So this is a know-your-numbers moment, and it is also a know-your-people moment. If you employ subcontractors, you need to be certain that the ones you call self-employed really are. Not on paper. In reality.

Employee, worker or subbie: the three tiers nobody explains

Most trades owners think there are two boxes: on the books, or self-employed. There are actually three. The middle one, "worker", is where a lot of people get caught out because nobody ever explained it to them.

An employee is on your payroll. You run PAYE, you deduct their tax and National Insurance, and they get the full set of employment rights: holiday pay, sick pay, redundancy, protection from unfair dismissal once they qualify.

A truly self-employed subcontractor runs their own business. They invoice you, they carry their own risk, they can turn work down, and they can send someone else to do the job if they choose. Under CIS you deduct tax from the labour part of their payment, but that deduction is about collecting tax, not about deciding their status.

A worker sits in the middle. They are not a full employee, but they are not running a real business of their own either. They turn up, they do what they are told, they work mostly or only for you, and in return they get some rights such as holiday pay and the minimum wage. This is the tier that caught Pimlico Plumbers out, and I will come back to that.

Read that last row again. Whichever tier you are dealing with, if the status is wrong, the bill comes to you. That is why getting the decision right is not paperwork tidiness. It is protecting your business.

The three tests HMRC actually uses

Control, personal service and mutuality of obligation. The three questions that decide it.

There is no single magic question. HMRC and the courts weigh up the whole relationship. But three tests do most of the heavy lifting, and if you understand these you are most of the way there.

Control. How much do you decide about what gets done, how, when and where? A genuine subcontractor takes a job and gets on with it their own way. If you are telling someone which hours to start, which order to do tasks in and standing over the method, that looks like employment.

Personal service and substitution. Does the work have to be done by that person, or can they send a suitably qualified replacement? A real right to send a substitute, one you cannot unreasonably refuse, points strongly to self-employment. A right that only lets them send another one of your own people is not a real right at all.

Mutuality of obligation. This is the one people miss. Are you obliged to keep offering work, and are they obliged to accept it? If there is an ongoing expectation that you provide work and they turn up for it, that mutual obligation is a hallmark of employment. A genuine subbie can say no thanks to your next job and go and work for someone else.

None of these tests works on its own. Someone can pass one and fail another. What HMRC looks at is the overall picture, and so should you.

Why CIS registration does not make anyone self-employed

This is the single biggest misunderstanding I see, so let me be blunt about it. Registering a subcontractor for CIS, deducting their 20% and filing your monthly return does not prove they are self-employed. CIS is a way for HMRC to collect tax. It is not a status test.

HMRC's own manuals say it plainly. The fact that a subcontractor is registered for CIS, whether for gross or net payment, is irrelevant when deciding whether they are really an employee. Where a contract of employment exists, that person is an employee and should be taxed through PAYE, full stop, no matter how many CIS returns you have filed for them.

So if your defence for a long-standing subbie is "but they are on CIS", you do not actually have a defence. You have a tax collection arrangement. The status question is still sitting there, unanswered.

What it costs you when you get it wrong

When status is wrong, the back tax, the NI and the penalties all land on the contractor.

Here is where it stops being theoretical. If HMRC decides a subbie should have been an employee, it looks to recover the tax and National Insurance that should have been deducted all along. It can go back several years. It will add the employer's National Insurance, currently 15%, and the whole liability rests with you, the contractor, not the worker.

Put the numbers together and the exposure can reach around 45% of everything you paid that person, before penalties. If they were inside CIS you will usually have already handed over 20% on the labour, which softens the blow, but you are still looking at a serious bill for the rest, plus interest, plus behavioural penalties if HMRC thinks you should have known better.

And it is not only HMRC now. Because the Fair Work Agency can bring a claim on a worker's behalf, someone who believes they were really staff can trigger a process without paying a penny in tribunal fees or hiring a solicitor. The cost of getting this wrong used to be a tax problem. In 2026 it is a tax problem and an employment law problem at the same time.

The Pimlico Plumbers lesson: labels do not decide status

If you ever want to see how little the label matters, look at the Pimlico Plumbers case that went all the way to the Supreme Court. The plumber at the centre of it, Gary Smith, was paying tax as a self-employed man and was even VAT registered. On paper he looked as self-employed as they come.

The court still found he was a worker. Why? Because the reality did not match the paperwork. He worked for that one firm for years, he wore their branding, he was controlled by them, and his right to send a substitute was limited to another of their own operatives, which is no real right at all. Personal service was the dominant feature. The label said self-employed. The facts said worker.

That is the mindset shift I want you to make. Stop asking "what have we called this person?" and start asking "if a stranger watched how we work together for a fortnight, what would they honestly say this is?"

Your seven-step subcontractor status check

Work through each subbie once. An afternoon now saves a five-figure letter later.

You do not need a solicitor on retainer to get on top of this. You need an honest afternoon and this checklist. Work through it for each person you currently treat as a subcontractor.

1. Start with the reality, not the contract. Describe out loud how you actually work with this person day to day. That description, not the paperwork, is your starting point.
2. Test control. Do you set their hours, their order of work and their method, or do they decide how to deliver the job? The more you control, the more it looks like employment.
3. Test substitution. Could they send a qualified replacement and would you accept it? If the honest answer is no, personal service points towards employment.
4. Test mutuality of obligation. Are you expected to keep giving them work, and are they expected to take it? Ongoing mutual obligation is an employment signal.
5. Run CEST and save the result. Use HMRC's free tool for each subbie, answer it truthfully, and file the outcome with the date.
6. Look at the whole picture. Do they work only for you? Do they use their own tools and van? Do they carry real financial risk, quote for jobs and fix their own mistakes at their own cost? These integration and risk factors tip the balance.
7. Fix any mismatch. If the reality says employee or worker, either change how you work together so it is true self-employment, or put them on the right footing. Do not leave a known mismatch sitting there.

Getting your paperwork and your reality to match

Once you have run the checks, you will land in one of three places, and each has a clear next move.

A genuine subcontractor. Good. Now make sure the paperwork backs it up. A proper contract for services, evidence they work for others, their own insurance, their own tools, and a real substitution clause you would actually honour. Keep the CEST result on file. You are protecting a decision that is already true.

Really a worker or employee. Then be honest about it and move them onto the right basis. Yes, that means employer NI and payroll, and yes, it costs more. But a planned change on your terms is far cheaper than a backdated assessment on HMRC's terms. It also tends to be better for the person, and better for retention, which is a whole other conversation I have written about before.

Somewhere in between. This is the honest reality for many trades firms. If you want someone to stay self-employed in reality, the answer is not to rewrite the contract and hope. It is to change how you actually work together: let them take other clients, give them real control over the job, and mean it when you say they can send a substitute. The paperwork should describe the reality, not paper over it.

Whichever route you take, do not do it in a panic and do not do it alone. Talk it through with your accountant, and if the numbers are large, take proper employment advice. If you are also rethinking who should be on your team and how you bring people in, my piece on why informal recruitment fails is a good next read, and the wider picture on what the Employment Rights Act 2026 means for your trades business sits right alongside this decision. If losing good people is part of what is pushing you towards subbies in the first place, what actually makes tradespeople stay is worth an hour of your time.

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