Have you been asked to “get the contractor sorted”, but aren’t really sure what that means?
If so, you’re not alone. For many businesses, contractors and subcontractors are part of day-to-day operations, but misusing these terms, or misunderstanding their meaning, can lead to expensive payroll errors, HMRC fines, and serious HR issues.
We've put this guide together which breaks it down simply. Whether you work in payroll, HR, operations, or you’re the business owner wearing many hats, here’s how to get it right when dealing with Contractors vs Subcontractors or subbies.
Contractor vs Subcontractor: What’s the Difference?
| Feature | Contractor | Subcontractor |
|---|---|---|
| Hired by | Your business | The contractor |
| Works directly for you? | Yes | No (works for the contractor) |
| Paid by | You (the business) | The contractor |
| IR35 implications | Potentially, yes | Usually not directly |
| Needs a contract with | You | The contractor |
| Right to work checks | Your responsibility | Contractor's responsibility |
| Payroll exposure | Often yes | Indirect, but still a risk |
In a nutshell: A contractor works for you. A subcontractor works for them. If that chain isn’t crystal clear, your business could end up liable.
Why This Matters (A Lot)
From a compliance and payroll perspective, getting the classification right impacts many things:
- Payroll & Tax: Contractors inside IR35 must be taxed like employees. Subcontractors typically invoice the contractor.
- Pensions & Benefits: If IR35 applies, you may need to include the contractor in auto-enrolment.
- Right-to-Work Checks: Contractors must be checked by you. Subcontractors? Only if they’re working directly under your control.
- Employment Law: Misclassification can lead to claims for unpaid holiday, redundancy, or unfair dismissal.
⚠️ Even if you didn’t mean to misclassify someone, you could still be on the hook.
Real-life example of a new client we helped
A design agency hired a freelance project manager. She subcontracted three assistants without informing the company. When one of those assistants claimed unpaid holiday, the agency had no paperwork, and no idea who he was.
The MD came to us and we stepped in and:
- Ran an IR35 review for the project manager
- Drafted contracts with subcontractor clauses with the help of our partner, NatWest Mentor.
- Helped set up right-to-work tracking
- Clarified who the business was legally responsible for
Outcome: Claim dropped. Compliance tightened. Stress avoided.
So What Can Go Wrong?
- ❌ Backdated tax bills from HMRC
- ❌ Auto-enrolment non-compliance fines
- ❌ Claims for employment rights you didn’t realise you owed
- ❌ GDPR issues from undocumented staff
- ❌ Costly rework if the project goes off-track due to unclear chains of responsibility
What You Should Do (Today)
✅ Run an IR35 check for every contractor using HMRC’s CEST tool
✅ Draft contracts that include clauses about subcontractor use
✅ Ask contractors to confirm if anyone else will be working with them
✅ Collect right-to-work documents for every person working under your instruction
✅ Work with HR and payroll to document roles properly
Frequently Asked Questions - How to Tell a Contractor from a Subcontractor
Q: Do I need to include a contractor in our payroll?
Only if they fall inside IR35. If they’re genuinely independent, they invoice you directly.
Q: What if the contractor brings in someone else without telling us?
If you’re paying the bill and they’re working under your control, your business could still be liable.
Q: Can we use the same contract for all freelancers?
No. A “one size fits all” approach increases your risk. Tailor the contract based on IR35 and their working arrangements.
Q: Should subcontractors be covered by our insurance?
Only if your contract says so, but double check, as this is often missed.
How Crystal HR & Payroll Can Help
We help businesses stay compliant, even when things get complicated:
- IR35 reviews and documentation
- Payroll processing for contractors and freelancers
- Subcontractor contract clauses
- Templates and onboarding guidance
- Support from real people — not just software
???? Talk to our team today and avoid the risk.
Free Downloadable Resources
Visit our HR & Payroll Resources Page to access:
- HR Documents
- Employment Templates
- Guides
Final Thoughts
Contractors and subcontractors can bring flexibility and skill, or compliance nightmares. Know who you’re hiring. Put it in writing and don’t assume “self-employed” is the same thing as “not your responsibility.”
Get it right the first time. Or contact us and we’ll help.
Written by Jon Pitt, Founder of Crystal HR & Payroll Ltd
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