Published on petlpay.com/blog | Category: Compliance & Payments Guide For UK, EU, South African Contractors & Subcontractors
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Paying subcontractors across multiple jurisdictions is one of the most administratively painful things a project-based business can do.
The rules are different in every country. The payment rails are different. The compliance obligations are different. And most payment tools still require you to handle project management, invoicing, compliance and tax elsewhere.
This is a practical guide to managing and paying subcontractors across the UK, EU, and South Africa covering the compliance requirements, the payment mechanics, the common mistakes, and what infrastructure actually makes it manageable at scale.
UK subcontractor payments: what you need to know
The Construction Industry Scheme (CIS)
If you are paying subcontractors in UK construction, CIS is not optional. It’s now a mandatory HMRC scheme that applies to every payment made to a subcontractor for construction work.
What CIS requires:
Verification.
Before making any payment to a subcontractor, you must verify their status with HMRC. The verification determines their deduction rate: 0% (gross payment status, granted to established, compliant businesses), 20% (standard rate, most subcontractors), or 30% (higher rate, unregistered or unverified subcontractors).
Deduction at source.
You deduct tax from the labour element of every payment at the verified rate. Materials are not deducted. The deducted amount is paid directly to HMRC on the subcontractor's behalf.
Monthly returns.
Every month, you must file a CIS return with HMRC declaring every payment made to every subcontractor, the deductions taken, and confirmation that the subcontractor was verified. This is not optional, and any late or incorrect returns can attract penalties.
Statements.
Every subcontractor must receive a written statement showing the gross payment, the deduction, and the net amount paid. This is their evidence for their own tax return.
Common mistakes:
- Failing to verify before the first payment (high-rate deduction then applies retrospectively)
- Deducting from materials as well as labour (only labour is deductible)
- Missing monthly return deadlines (£100 penalty for first month, escalating rapidly)
- Incorrect deduction rates due to outdated verification
Making Tax Digital (MTD) - April 2026
From April 2026, MTD for Income Tax applies to self-employed workers with income over £50k. CIS subcontractors above this threshold must use HMRC-compatible digital software for record-keeping and filing. This is a live requirement affecting a significant portion of the UK subcontractor base.
Professional services and IR35
For agencies and professional services businesses paying UK contractors outside construction, IR35 is the primary compliance consideration.
IR35 determines whether an engagement should be treated as disguised employment. If it does, the contractor's fees are subject to income tax and National Insurance as if they were an employee, and the paying business is liable for the employer's NI contribution.
Key IR35 factors:
- Control: Does the client control how, when, and where the work is done?
- Substitution: Can the contractor send a substitute?
- Mutuality of obligation: Is the client obliged to offer work and the contractor obliged to accept?
For genuine project-based, output-focused engagements where the contractor has real substitution rights and works for multiple clients, IR35 typically does not apply. But documentation matters and the engagement structure needs to reflect the genuine commercial reality.
UK payment rails
For UK subcontractors, Faster Payments is the standard: near-instant, free, available 24/7. Open banking enables programmatic access to Faster Payments rails, meaning payment can be triggered automatically from within a project payment workflow, without manual bank instruction. BACS is the alternative for batch payments but has a 3-day settlement window, which is increasingly unacceptable for contractors expecting prompt payment.
EU subcontractor payments: the key considerations
VAT and reverse charge
For UK businesses paying EU-based contractors post-Brexit, the reverse charge mechanism applies to B2B services. Instead of the contractor charging VAT on their invoice, the UK business accounts for the VAT itself (and reclaims it if VAT-registered). The contractor's invoice should state "reverse charge applies - customer to account for VAT."
This applies to digital and professional services. The practical implication: EU contractor invoices to UK clients should be zero-rated, and the UK business handles the VAT accounting. Getting this wrong creates VAT liability.
EU-to-EU payments
For EU businesses paying EU contractors, the intra-EU payment infrastructure is well-developed. SEPA Credit Transfer settles in 1 business day across all Eurozone countries. SEPA Instant settles in seconds. Both are low-cost and widely accessible.
For UK businesses sending to EU contractors, SEPA is not directly accessible as you are sending from GBP to EUR across a cross-border transfer. Open banking rails from the UK to EU accounts work well via providers such as Petl Pay that have access to both systems.
Country-specific considerations
EU countries vary in their contractor compliance requirements. Key differences:
Germany: Complex freelancer/contractor classification rules. Scheinselbstständigkeit (false self-employment) is aggressively enforced. Genuine project-based contractors with multiple clients are generally fine, but documentation of the commercial relationship matters.
France: Auto-entrepreneur regime simplifies individual contractor status. Payments to French micro-entrepreneurs are simpler to structure than to limited companies.
Portugal / Eastern Europe: Generally more straightforward for project-based contractor payments. An increasing number of UK and US agencies use Portuguese, Polish, Romanian, and Bulgarian contractors specifically because the combination of EU membership, English proficiency, and cost efficiency is attractive.
South African subcontractor payments: the practical guide
Paying South African contractors from the UK is one of the most common cross-border payment flows for British agencies and professional services businesses and one of the most poorly served by existing payment infrastructure.
The tax landscape
South African contractors are subject to South African tax on income earned for services rendered. From a UK payer perspective, there is typically no withholding obligation, you pay the gross invoice amount, and the contractor handles their own SARS (South African Revenue Service) obligations.
However, if you are paying through a structured arrangement where the South African contractor is classified as an employee for SA purposes, PAYE and UIF obligations apply. For genuine project-based, freelance engagements, this is not the case, but the documentation of the commercial relationship matters.
South African contractors should be registered as provisional taxpayers with SARS and file biannual provisional returns. Many do not. That is their compliance obligation, not the payer's, but reputable platforms prompt for correct structuring.
The payment rail problem
This is where the real pain is.
SWIFT transfers to South African bank accounts: slow (2-5 days), expensive (£15-35 sender fee plus correspondent bank fees plus FX spread), and opaque. For small contractor payments, the fees can represent 3-8% of the transaction value.
Local rails (EFT via South African banking infrastructure): fast (same or next day), cheap, but only accessible if you have a South African banking relationship or use a provider with local settlement capability.
USDC stablecoin: increasingly the most practical solution for South African contractors who are comfortable with crypto. Settlement is instant and near-zero cost. The contractor receives USDC and converts to ZAR via a platforms like Petl Pay at competitive rates. The total cost is typically ~1%, compared to 3-8% via SWIFT.
Documentation requirements
South African Reserve Bank (SARB) regulations require that cross-border receipts above certain thresholds be accompanied by documentation of the commercial purpose. Contractors receiving regular foreign income should ensure they have:
- A signed service agreement or project contract
- Invoices referencing the specific project and deliverables
- Foreign capital allowance declaration, if applicable
Platforms that structure payments with proper documentation: invoice reference, project code, service description, make this significantly less painful for the contractor.
Managing multi-jurisdiction subcontractor payments in practice
If you are running projects with subcontractors across UK, EU, and South Africa simultaneously, the administrative overhead of managing compliance and payments per jurisdiction manually is significant. Here is what a practical multi-jurisdiction payment workflow looks like:
Contractor onboarding (once) Record jurisdiction, tax status, bank/wallet details, and payment preference per contractor. For UK construction contractors: CIS verification status and deduction rate. For EU contractors: VAT status and reverse charge confirmation. For South African contractors: SARB documentation preferences and rail choice (local EFT vs USDC).
Invoice generation (per project milestone). Invoice generated from work logged, describing deliverable, amount, and project reference. Compliance fields populated automatically based on contractor jurisdiction: CIS deduction for UK construction, reverse charge note for EU, and invoice reference for SARB documentation.
Approval (per payment) Single approval flow for all pending payments across all jurisdictions. One dashboard showing everything pending, approved, and settled.
Settlement (automated) Payment routed per contractor preference: Faster Payments for UK, SEPA for EU, local EFT or USDC for South Africa. Settlement confirmation returned to the project record. Accounting software updated.
Monthly compliance (automated) CIS monthly return filed for UK construction payments. VAT reverse charge recorded for EU payments. Payment documentation archived for South African SARB requirements.
This workflow which currently requires 6+ tools and significant manual effort is what Petl Pay automates in a single platform.
The accountant-in-the-loop model
For businesses managing significant contractor volumes across multiple jurisdictions, having an accountant available to review compliance flags is a meaningful risk management layer, without requiring a full-time hire.
The emerging model: a project payment platform handles the automated compliance (CIS deduction calculations, MTD filing, VAT treatment) and flags anything requiring human review. An accountant, either UK-based for regulatory compliance sign-off, or South Africa-based for cost-efficient review of SA-specific matters, reviews the flagged items and signs off.
This combines the speed and scale of automated compliance with the professional accountability of human oversight. It is particularly valuable for businesses at the growth stage, past the point where founders can manage compliance manually, not yet at the scale to justify a full-time finance hire.
Common mistakes and how to avoid them
Paying UK construction subcontractors without CIS verification.
Consequence: HMRC treats the payment as unverified, and the payer is liable for the 30% deduction, retrospectively. Verify every subcontractor before the first payment, not after.
Missing CIS monthly return deadlines.
Consequence: £100 penalty for the first month late, escalating for subsequent months. The return is required even if no payments were made, a nil return must be filed.
Using SWIFT for South African contractor payments.
This is not a compliance error, just expensive. At 3-8% total cost, SWIFT is a significant ongoing friction for regular payments to SA contractors. Local rails or stablecoin settlement are materially better.
Incorrect IR35 assessment for professional services contractors.
Consequence: potential liability for income tax and employer NI contributions on contractor fees. Get the engagement structure right at the start, not after HMRC queries it.
No documentation for South African SARB requirements.
Consequence: contractor difficulty receiving funds or having receipts approved. Ensure every payment has proper invoice documentation referencing the commercial purpose.
FAQ
Do I need to register for CIS as a contractor paying subcontractors?
Yes. Any business paying subcontractors for construction work must register as a contractor with HMRC before making any payments. Registration is done online via the Government Gateway.
How do I verify a subcontractor's CIS status?
Via HMRC's CIS online verification service. You provide the subcontractor's UTR (Unique Taxpayer Reference), and HMRC returns their verification status and applicable deduction rate. This must be done before the first payment.
What is the CIS deduction rate for unregistered subcontractors?
30%. This is significantly higher than the standard 20% rate. Subcontractors should register with CIS to access the standard rate and establish a strong compliance record to qualify for gross payment status (0%).
How should I pay South African contractors to minimise costs?
For contractors comfortable with crypto: USDC stablecoin settlement is typically the most cost-efficient option, near-zero transfer cost, instant settlement, contractor converts to ZAR via local exchange at competitive rates. For contractors who prefer traditional banking, a provider with local South African rail access (avoiding SWIFT routing) dramatically reduces cost and settlement time.
Does IR35 apply to South African contractors working for UK agencies?
No. IR35 applies only to workers providing services through intermediaries (typically a personal service company) in the UK. South African contractors providing services from South Africa are outside the IR35 scope. Standard cross-border contractor tax treatment applies.
What happens if I get CIS wrong?
HMRC penalties for CIS non-compliance are significant: penalties for late or incorrect returns, potential liability for incorrect deductions, and interest on unpaid amounts. HMRC audits of construction businesses are increasing, up 15% year-on-year. Getting the compliance infrastructure right before scale is significantly cheaper than remediation after an audit.
Petl Pay handles CIS compliance, multi-jurisdiction payments, and project reconciliation automatically. Built for UK, EU, and South African contractor payments. Sign up at petlpay.com.
