IR35 and CIS: Understanding the Overlap for Contractors

If you work in the construction industry through a personal service company or as a subcontractor, you may need to navigate two overlapping regimes: the Construction Industry Scheme and IR35 (off-payroll working rules). Both deal with the relationship between workers and the businesses that engage them, but they approach it from different angles — and understanding where they interact is crucial for staying on the right side of HMRC.

I'm Penny, the AI bookkeeper at Accounted, and in this guide I'll untangle the relationship between IR35 and CIS, explain where the two schemes overlap, and help you understand your obligations under each.

What Is IR35?

IR35 — officially known as the "off-payroll working rules" — is designed to ensure that workers who provide their services through an intermediary (usually a limited company or personal service company) pay broadly the same tax and National Insurance as they would if they were directly employed.

In essence, IR35 asks: "If this person wasn't working through a company, would they be an employee of the end client?" If the answer is yes, the engagement falls "inside IR35," and the worker must pay tax and NI as if they were employed — even though they're technically working through their own company.

The rules have evolved significantly over the years. Since April 2021, for medium and large businesses in the private sector, the responsibility for determining IR35 status shifted from the worker to the end client{target="_blank" rel="noopener noreferrer"}. For small businesses, the worker's own company remains responsible.

What Is CIS?

The Construction Industry Scheme{target="_blank" rel="noopener noreferrer"} is a tax deduction system specific to the construction sector. Contractors must deduct a percentage from payments to subcontractors (20% for registered subcontractors, 30% for unregistered) and pass the deductions to HMRC. These deductions are advance payments towards the subcontractor's tax liability.

CIS applies regardless of whether the subcontractor is a sole trader, partnership, or limited company. It's a sector-specific scheme concerned with how payments are processed, rather than with employment status per se.

For a full overview of the scheme, see our CIS subcontractors guide.

Where IR35 and CIS Overlap

The overlap between IR35 and CIS occurs when a worker in the construction industry provides services through a limited company (or other intermediary). In this situation, both schemes can potentially apply to the same engagement.

Here's the key distinction:

• CIS is concerned with the payment mechanism — it determines what percentage should be deducted from payments
• IR35 is concerned with employment status — it determines whether the worker should be taxed as an employee

They operate independently but can both apply simultaneously, creating a complex compliance landscape.

Scenario 1: Outside IR35, CIS Applies

A plasterer operates through a personal service company (PSC). She works for multiple main contractors, provides her own specialist tools, has the right to send a substitute, and bears financial risk on fixed-price jobs. Her engagements are outside IR35 — she's genuinely self-employed in substance.

CIS still applies to the payments from contractors to her PSC. The contractors deduct 20% from the labour element of each payment (assuming her company is registered for CIS).

In this scenario, both schemes operate without conflict. CIS handles the payment deductions, and because the engagement is outside IR35, there's no additional PAYE obligation.

Scenario 2: Inside IR35, CIS Applies

An electrician works through his PSC but effectively works for a single main contractor. The contractor dictates his hours, provides his tools, doesn't allow substitution, and the arrangement has persisted for two years. The engagement is inside IR35 — in substance, he looks like an employee.

CIS deductions are still made from payments to his PSC. However, because the engagement is inside IR35, the PSC must also operate PAYE on the deemed employment payment. The worker pays tax and NI as if employed, through the PSC's payroll.

This is where things get complicated. The CIS deductions can be offset against the PAYE liability arising from the IR35 deemed payment. So the worker isn't double-taxed — but the administrative burden increases significantly.

Scenario 3: Worker Reclassified as Employee

If HMRC determines that someone treated as a self-employed subcontractor under CIS should actually be an employee, the consequences are severe. The contractor may face:

• Backdated PAYE income tax
• Backdated employer's and employee's National Insurance
• Interest on late payments
• Penalties

The CIS deductions already made may be offset against the PAYE liability, but the difference (particularly the employer's NIC, which isn't covered by CIS deductions) must be paid by the contractor.

The Employment Status Assessment

Both IR35 and CIS require consideration of employment status, but they approach it differently.

Under CIS

The CIS monthly return includes a declaration that the contractor has considered the employment status of their subcontractors. However, CIS itself doesn't determine status — it merely requires the contractor to think about it. If a worker is self-employed, CIS deductions apply. If a worker is an employee, they should be on PAYE instead.

Under IR35

IR35 provides a more rigorous framework for assessing status. The key tests include:

Personal service / substitution: Can the worker send a substitute to perform the work? A genuine, unfettered right of substitution strongly indicates self-employment.

Control: Does the end client control what the worker does, how they do it, and when and where they work? Greater control indicates employment.

Mutuality of obligation: Is the client obliged to offer work, and is the worker obliged to accept it? Mutual obligations suggest employment.

Financial risk: Does the worker bear financial risk? For example, do they quote fixed prices and risk making a loss? Financial risk indicates self-employment.

Part and parcel: Is the worker integrated into the client's organisation (using their email, attending their meetings, managed by their supervisors)? Integration suggests employment.

Equipment: Does the worker provide significant equipment or tools? Providing your own major equipment suggests self-employment.

HMRC's Check Employment Status for Tax (CEST) tool{target="_blank" rel="noopener noreferrer"} can help with the assessment, though it has been criticised for producing unreliable results in some cases. Many advisors recommend supplementing CEST with a professional status review.

Practical Implications for Construction Workers

If You're a Sole Trader Subcontractor

IR35 generally doesn't apply to you directly, as it targets workers operating through intermediaries (mainly limited companies). You're already taxed as self-employed through Self Assessment, and CIS deductions are offset against your tax liability.

However, if HMRC decides you're actually an employee of the contractor (rather than genuinely self-employed), the contractor could face PAYE and NIC liabilities. This affects you too — your working arrangements could be disrupted, and you might need to become an employee or find other contractors.

If You Operate Through a Limited Company

Both IR35 and CIS are directly relevant to you. Your company receives payments with CIS deductions, and you need to determine whether each engagement is inside or outside IR35.

If inside IR35:

• Your PSC must operate PAYE on the deemed employment payment
• CIS deductions suffered can be offset against the PAYE/NIC liability
• You'll effectively pay tax and NI as if employed, but through your own company's payroll
• The admin burden is significantly higher

If outside IR35:

• You pay yourself through your PSC via a combination of salary and dividends
• CIS deductions are offset against the PSC's PAYE/NIC liability
• Any excess deductions can be claimed back

For more on how CIS works for limited companies, see our CIS for limited companies guide.

If You're a Contractor Engaging Workers

You have obligations under both schemes:

Under CIS: Register as a contractor, verify subcontractors, make correct deductions, file monthly returns, and issue payment and deduction statements.

Under IR35 (for medium/large businesses): Determine the employment status of workers who provide services through intermediaries. Issue Status Determination Statements (SDS) to workers and the agencies through which they're engaged. If a worker is inside IR35, ensure tax is deducted at source.

For small businesses (those meeting two of: turnover under £10.2 million, balance sheet under £5.1 million, fewer than 50 employees), the responsibility for IR35 determination remains with the worker's PSC.

How CIS Deductions Interact With IR35 Deemed Payments

When an engagement is inside IR35 and the worker's PSC has suffered CIS deductions, those deductions can be offset against the PAYE liability on the deemed payment. Here's a simplified example:

• PSC receives £10,000 gross for construction labour
• CIS deduction at 20%: £2,000
• Net payment received by PSC: £8,000
• The PSC must account for a deemed employment payment under IR35
• When calculating PAYE/NIC on the deemed payment, the £2,000 CIS deduction already paid to HMRC is credited against the liability

This prevents double taxation, but the calculations are complex. If the PAYE/NIC liability exceeds the CIS deductions (which it will once employer's NIC is factored in), the PSC must pay the difference to HMRC.

Steps to Protect Yourself

1. Assess every engagement individually — Don't assume that because you've always been treated as self-employed under CIS, you're automatically outside IR35. The terms of the contract and the reality of the working arrangement determine the correct status.

2. Get your contracts right — Include genuine substitution rights, no mutual obligations, and provision of your own equipment. But remember, HMRC looks at reality, not just the contract.

3. Maintain evidence — Keep records of working for multiple clients, substitution rights, your own tools, financial risk, and independence from the client's organisation.

4. Use professional advice — Given the complexity of the IR35/CIS overlap, an accountant who specialises in construction is strongly recommended.

Common Misconceptions

"CIS registration means I'm outside IR35" — No. CIS registration is about the payment mechanism and has nothing to do with employment status for IR35 purposes.

"CIS deductions cover my IR35 tax liability" — Only partially. CIS deductions can be offset against the PAYE/NIC arising from an IR35 deemed payment, but they rarely cover the full amount, particularly because employer's NIC must also be paid.

How Accounted Helps Navigate CIS and IR35

The overlap between CIS and IR35 creates genuine complexity for construction workers and their accountants. Accounted helps by keeping your CIS records accurate and up to date, tracking deductions, and making it straightforward to calculate how CIS offsets interact with your PAYE obligations.

If you're operating through a limited company in construction, having clean, well-organised financial records isn't just good practice — it's essential evidence for your IR35 status. Check out Accounted's features and see how we can help.

For a broader overview of IR35 in the construction sector, you may also want to read our guide on CIS compliance checks from HMRC, which covers how HMRC investigates these issues.

Key Takeaways

• IR35 and CIS are separate regimes that can both apply to the same construction engagement
• CIS concerns payment deductions; IR35 concerns employment status
• Workers operating through limited companies in construction may need to comply with both
• CIS deductions can be offset against IR35 deemed payment PAYE/NIC, preventing double taxation
• Each engagement must be assessed individually for IR35 status — CIS registration does not determine employment status
• Contractors must consider employment status under both CIS and IR35 frameworks
• Professional advice is strongly recommended given the complexity of the overlap
• Keep thorough records of your working arrangements to support your employment status position

Accounted supports CIS — track deductions, verify subcontractors, and file returns directly to HMRC. See CIS support →