In construction arbitrage, you pay tax on the spread - the difference between what you charge the client and what you pay your subcontractors. Subcontractor costs are a deductible business expense, so the gross job value never hits your taxable income. The UK adds the Construction Industry Scheme on top; the US has self-employment tax and quarterly payments; Australia requires a TPAR; Canada runs on GST/HST.
The core mechanic: tax on the spread, not the gross
This is the part that trips up beginners, so I want to be direct about it.
You win a $60,000 renovation job. You pay your subcontractors $45,000 in labour and $3,000 in materials. Your gross profit - the spread - is $12,000. That $12,000, minus any other deductible running costs (insurance, software, vehicle, admin), is your taxable income from that job.
You do not pay income tax on the $60,000. The $48,000 that went to subs and materials is a legitimate business deduction. Construction arbitrage is not a magic tax structure - it is just a normal business model where the cost of sales (your subcontractors) is high relative to revenue. That is exactly how a general contractor's tax return looks.
Keep clean records of every sub payment: the invoice, the amount, the date, the job it relates to. In every jurisdiction covered here, you need that paper trail. It is also the foundation for any audit defence.
UK: the Construction Industry Scheme is not optional
If you hold main contractor agreements in the UK and pay subcontractors to carry out construction work, you are a CIS contractor under HMRC's Construction Industry Scheme. It does not matter that you do not hold a hammer yourself.
Your obligations, in order:
1. Register for CIS before you pay your first sub. You register as a contractor through HMRC. If you are also doing some construction work yourself, you register as both contractor and subcontractor.
2. Verify every subcontractor with HMRC before you pay them. You call the CIS helpline or use the online service. HMRC tells you the deduction rate for that sub.
3. Make the right deduction from the labour element of each payment. Materials the sub has paid for are excluded. On the labour portion:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% for subcontractors with HMRC gross payment status
4. Give each sub a payment and deduction statement showing what was paid and what was deducted.
5. File a monthly CIS return with HMRC - even if you made no payments that month (from 6 April 2026 you must file a nil return or notify HMRC of inactivity). Pay over the deductions by the 19th of the following month (22nd if paying electronically).
The deductions you make are not your tax - they are an advance payment of the sub's tax, held by HMRC against the sub's own liability. Your tax is on your profit, paid via Self Assessment in the normal way. CIS and income tax are separate obligations.
For the full UK legality picture, see is construction arbitrage legal in the UK.
US: self-employment tax plus quarterly estimated payments
The US does not have a CIS-style withholding scheme for main contractors. Your tax obligations as a construction arbitrage operator running as a sole proprietor or single-member LLC are:
Self-employment tax: 15.3% on your net self-employment earnings - 12.4% for Social Security (capped at $184,500 of net self-employment income for 2026) plus 2.9% for Medicare with no cap. If your net income exceeds $200,000 ($250,000 married filing jointly), an additional 0.9% Medicare surcharge applies. You calculate this on Schedule SE and pay it alongside income tax.
Income tax: at your marginal federal rate, plus state income tax where applicable (rates and rules vary by state). The spread from your jobs is ordinary income.
Quarterly estimated payments: because no employer is withholding tax for you, you pay estimated tax four times a year using Form 1040-ES. Missing or underpaying quarterly estimates triggers a penalty. The general safe harbours: pay at least 90% of this year's tax, or 100% of last year's tax (110% if your prior-year AGI exceeded $150,000).
1099-NEC for your subcontractors: if you pay an individual, partnership, or estate $2,000 or more in a calendar year for services, you must issue a Form 1099-NEC. The threshold changed from $600 to $2,000 for tax year 2026, with inflation adjustments from 2027. Get a signed W-9 from every sub before you pay them - the W-9 gives you the information you need to issue the 1099 correctly.
Business structure matters here. Running through an S-corp or a multi-member LLC can reduce the self-employment tax bill by letting you pay yourself a reasonable salary (subject to payroll taxes) and take the remainder as a distribution. That is a decision for a US-based accountant who can model the numbers against your actual income level.
For the US legality overview, see is construction arbitrage legal in the US.
Australia: ABN, GST, and the TPAR requirement
ABN: you need an Australian Business Number before you operate. Without one, payers must withhold the top rate of tax from payments to you.
GST: register once your annual turnover reaches $75,000. Once registered, you add 10% GST to your invoices, collect it from clients, claim GST credits on your purchases (including your subs' GST-inclusive invoices), and remit the net GST to the ATO quarterly or annually.
If a subcontractor does not provide an ABN and is not exempt, withhold the top withholding rate from the payment and remit it to the ATO.
TPAR - the one most operators miss: if your business primarily operates in building and construction services (50% or more of your business income or activity), you must lodge a Taxable Payments Annual Report every year by 28 August. You report the ABN, name, address, total paid, and total GST included for every contractor you paid during the financial year. Paper lodgment is no longer accepted - TPAR must be filed online through ATO Online Services for Business.
The TPAR is how the ATO cross-checks that your subs have declared the income you paid them. Not lodging it is a compliance failure that attracts penalties and flags your business for review.
Income tax: your net business income (spread after deductible costs) is taxed at individual marginal rates for sole traders, or at the company rate for a Pty Ltd. The small business entity concessions and instant asset write-off rules may apply depending on your turnover - worth discussing with an Australian accountant.
Canada: GST/HST registration and business income tax
Canada does not have a CIS equivalent. The main tax obligations for a construction arbitrage operator are:
GST/HST: most provinces use HST (Harmonised Sales Tax), which combines the federal GST with provincial tax in a single rate. Rates vary by province - for example, Ontario charges 13% HST, British Columbia charges 12% (5% GST + 7% provincial). Register with the CRA once your annual revenue exceeds $30,000 - that is the small supplier threshold. Above it, you must register, collect, and remit. Below it, registration is optional.
Collect GST/HST from your clients on the full job value. Claim input tax credits on GST/HST your subs charge you. Remit the net amount to CRA on whatever reporting period CRA assigns (monthly, quarterly, or annually based on your annual revenue).
Income tax: your profit from construction arbitrage is business income, reported on your T2125 (business statement) as part of your T1 personal return (sole proprietor), or on a T2 corporate return if you are incorporated. Subcontractor payments are deductible as a cost of sales. The CRA's publication T4002 (Self-employed Business, Professional, Commission, Farming, and Fishing Income) covers the deduction rules in detail.
Quebec operates under its own provincial construction framework - check the Régie du bâtiment du Québec (RBQ) alongside CRA obligations if you are operating there.
Business structure: where you book most of the difference
Across all jurisdictions, the choice of business structure - sole trader, partnership, LLC, corporation, Pty Ltd - changes how and at what rate your profit is taxed. The construction arbitrage model itself does not determine the structure; your accountant does, based on your income level, the country you are in, and whether you want retained earnings in the business or to pull everything as salary or distributions.
The model is the same whatever structure you use. What changes is how efficiently you extract the spread.
The tax is on the spread, not on the gross. Get that one concept right and the rest is mechanics.
Where to go from here
For the full compliance picture by country, is construction arbitrage legal is the global overview. For what realistic spreads look like and what you can actually make, see how much can you make with construction arbitrage. For the licensing and registration requirements that sit alongside the tax obligations, see do you need a contractor licence for construction arbitrage. For the insurance stack that goes alongside compliance, see what insurance do you need for construction arbitrage.
If you want to work through the numbers alongside people already running this, the room is Construction Arbitrage Players on Skool - the community where this gets built, not just theorised.
And for the full picture of how the model works from the inside, I am writing THE FAMILY SECRET - How Construction Arbitrage Really Works. Not out yet, but coming.
Last checked: 6 July 2026.
Frequently asked questions
Do I pay tax on the full job value or just my profit in construction arbitrage?+
Your profit - the spread. You charge the client $50,000, you pay the sub $38,000, your sub costs are a deductible business expense, so your taxable income from that job is roughly $12,000 minus any other allowable costs. You never pay income tax on revenue that went straight to your subcontractors.
Do I need to register for the UK Construction Industry Scheme if I subcontract all the work?+
Yes. If you hold the main contractor agreement and pay subcontractors to do construction work, you are a contractor under CIS regardless of whether you do any work yourself. You must register before paying your first sub, verify each sub with HMRC, deduct the right rate (20% for registered subs, 30% for unregistered), file a monthly return, and remit the deductions to HMRC.
What is the self-employment tax rate for a US construction arbitrage operator in 2026?+
15.3% on net self-employment earnings - 12.4% for Social Security (capped at $184,500 of net income for 2026) plus 2.9% for Medicare (no cap). This is on top of your ordinary income tax. Running through an S-corp or LLC taxed as an S-corp can reduce the self-employment tax bill, but that requires advice from a US accountant.
Do I need to issue 1099s to my subcontractors in the US?+
Yes, if you pay an individual, partnership, or estate $2,000 or more during the tax year for services (the threshold changed from $600 to $2,000 for 2026 and will be inflation-adjusted after). Use Form 1099-NEC. Keep W-9s on file for every sub before you pay them - not after.
Do I need to register for GST in Australia if I'm doing construction arbitrage?+
Yes, once your annual turnover reaches $75,000. Below that threshold registration is optional but often worth doing anyway so you can claim GST credits on your costs. You also need to lodge a Taxable Payments Annual Report (TPAR) each year by 28 August, reporting every sub you paid - this is a building and construction industry requirement under ATO rules.
Is construction arbitrage tax different from running a regular construction company?+
No - the tax rules for a main contractor who subcontracts all the work are the same as for any other main contractor. You hold the client contract, so the tax obligations sit with your business. The difference is structural: your costs are almost entirely sub labour and materials (both deductible), which means your taxable profit is the spread. The compliance obligations - CIS in the UK, 1099s in the US, TPAR in Australia - are the same regardless of how much of the work you do yourself.
Mohamed El HadriCo-Founder
I'm a co-founder of several construction companies. I built a construction business from a 30-van operation into a lean model with 1,400+ subcontractors in the database - winning the work as the main contractor, subbing it out, and running it as a system from a laptop across multiple countries. I write this site from what actually works.
@mointhemarket · 30k followers on Instagram →Run the model with people who already do
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