A development company engaging a project manager, quantity surveyor or site manager through their own personal service company will usually have one question front of mind: is this person inside CIS, and at what deduction rate? It's the wrong first question. CIS and IR35 are entirely separate regimes asking entirely different things, and a worker can be processed perfectly correctly under one while the developer is quietly building up a tax exposure under the other.
CIS and IR35 are not the same test
The Construction Industry Scheme decides how much tax a contractor withholds from a payment for construction operations, and it applies to the payment regardless of whether the person receiving it is a sole trader, a partnership or a limited company — see our guides to CIS deemed contractor status and gross payment status for how that side works. IR35, and the off-payroll working rules that sit alongside it, ask something different entirely: if the worker's company were taken out of the picture, would they actually be an employee of the business they're working for? These questions run on completely separate tracks, and a worker can pass through CIS correctly at the standard deduction rate while still being an employee in substance for IR35 purposes — the two assessments simply don't inform each other.
This confusion catches out developers surprisingly often, because CIS registration feels like a settled answer to "how do we pay this person," and it's easy to assume that settling the payment mechanics has also settled the underlying employment question. It hasn't. Plenty of consultancy work on a development — project management, design coordination, commercial and QS input — falls outside CIS altogether because it isn't a construction operation in the first place, which means the IR35 question is the only one that applies, with nothing else in the payment process prompting anyone to ask it.
Who actually has to make the call
Since 6 April 2021, medium and large private sector businesses engaging a worker through a personal service company are responsible for deciding the worker's status themselves, and for issuing a Status Determination Statement setting out that decision and the reasoning behind it. Where the engagement is decided to be inside IR35, the party paying the worker's company — usually the developer itself, sometimes an agency further up the chain — has to operate PAYE and National Insurance on the payments as if they were a salary.
Small companies sit outside this and remain under the older rules, where the worker's own company continues to assess and apply IR35 itself. A company is small if it meets at least two of three conditions — turnover of £15 million or less, a balance sheet total of £7.5 million or less, and 50 or fewer employees — across two consecutive financial years. Many single-project development SPVs comfortably qualify as small in isolation, but the test looks at the group, not just the vehicle doing the engaging: where the SPV sits under a wider corporate structure, the group's combined figures are what get tested, and a portfolio of SPVs under one holding company can tip the group over the threshold even where each individual entity looks small on paper. Losing the small-company exemption partway through a project, without anyone noticing the group had grown into it, is one of the more common ways developers find themselves non-compliant without having changed anything about how they actually engage people.
What actually decides the answer
Status isn't set by what the engagement letter calls the relationship, and it isn't set by the fact that a limited company is involved at all — it's set by the reality of how the work happens. The factors that matter most are control (who decides how, when and where the work is done), substitution (can the worker genuinely send someone else in their place, and would the developer accept it), mutuality of obligation (is the developer obliged to keep offering work and the worker obliged to accept it), and financial risk (does the worker carry any of their own, or are they simply paid for time worked like an employee would be).
A site manager working set hours on one scheme, taking instructions from the developer's own management team, with no real ability to send a substitute and no financial risk of their own, looks much closer to an employee than a genuinely independent contractor — regardless of how the contract is drafted. HMRC's CEST tool can be used to help reach a view and, where used correctly with accurate information, HMRC will generally stand by the result, but it is widely criticised for not properly weighing mutuality of obligation, and it isn't a substitute for actually understanding how the engagement works day to day.
What it costs to get wrong
Where a medium or large client doesn't take reasonable care over a determination, or the party paying the worker's company fails to apply PAYE and National Insurance correctly on an inside-IR35 engagement, HMRC can pursue the unpaid tax, interest and penalties from within that contractual chain. Because engagements often repeat across several projects with the same consultants, a status position that's been wrong from the start doesn't surface as one bad payment — it surfaces as years of engagements assessed on the same flawed basis, discovered together, usually during a wider review rather than in isolation.
A blanket approach — deciding every consultant on every project is "obviously self-employed" because that's how the industry has always worked, or conversely treating everyone as inside IR35 to avoid the analysis altogether — is exactly the kind of shortcut that creates this exposure. Each role needs its own assessment against its own facts, and that assessment needs revisiting if the way the role is actually being worked changes partway through a project.
Common mistakes
- Assuming CIS registration or the CIS deduction rate has any bearing on the separate IR35 status question
- Treating the group's SPV structure as automatically small without testing the combined group figures against the current thresholds
- Relying on a contract's wording rather than how the engagement actually operates day to day, particularly around control and substitution
- Making one blanket determination for a role type instead of assessing each individual engagement on its own facts
- Never revisiting a status determination once the scope or working pattern of the engagement has changed
What this means for developers
Any development business regularly engaging project managers, quantity surveyors, architects or site managers through their own companies should know, role by role, which side of the small-company threshold it sits on, and should be making (and documenting) a genuine status assessment for each engagement rather than defaulting to habit. Getting the analysis right before the engagement starts is materially cheaper than untangling several years of it after HMRC has asked the question first. It's a review we regularly run for development clients alongside their wider structuring under our Property Advisory service.
Common questions
Does the Construction Industry Scheme cover IR35 too?
No. CIS is a withholding mechanism that governs how much tax is deducted from payments for construction operations, and it applies regardless of whether the recipient is a sole trader, a partnership or a company. IR35 and the off-payroll working rules ask a completely different question: whether a worker supplying services through their own company would, if that company were removed from the arrangement, actually be an employee. A worker can be correctly processed through CIS and still be caught by IR35 at the same time.
Which property development companies fall under the off-payroll working rules?
Medium and large private sector end clients are responsible for making the status determination themselves; small companies are not, and responsibility stays with the worker's own personal service company under the older rules. A company is small if it meets at least two of three conditions for two consecutive financial years: annual turnover of £15 million or less, a balance sheet total of £7.5 million or less, and 50 or fewer employees. Where the engaging company is part of a group, the group's combined figures are what's tested, not the individual company's alone.
What happens if a status determination is wrong?
Where a medium or large client fails to take reasonable care over a determination, or the party paying the worker's company fails to apply PAYE and National Insurance correctly on an inside-IR35 engagement, HMRC can pursue unpaid tax, interest and penalties from within that contractual chain, potentially reaching back across several years of engagements assessed on the same flawed basis.
Can a site manager or project manager working through a personal service company be treated as self-employed?
It depends on the reality of the working relationship, not the paperwork. A worker who follows the developer's instructions on how and when to work, cannot send a substitute in their place, and is integrated into the team for the length of a single project looks much closer to an employee than a genuinely independent contractor, whatever the engagement letter says. Each role needs its own assessment against the actual facts.
Kieran Holsgrove is a Director and Co-Founder of Grafene Accounting, the property tax specialist firm based in Liverpool. He advises property developers, investors and landlords across Merseyside, Greater Manchester, Lancashire and Cheshire on tax structuring, developer VAT, SDLT and the long-view decisions that compound over the life of a portfolio.
This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.