It used to be the case if you only work for one organisation you were not self employed The HMRC had six qualifying rules to be self employed, but I have a feeling these have been relaxed. Also note 'theoddone', I have a feeling the link the the CIS, only really applies to the construction, I get the feeling it was an attempt to crackdown on the contruction industry. The sole trader status (self employment), I think is different from the CIS scheme.
I would say that most instructors would be better off self employed, unless the club cover the cost of renewals, medicals, etc. If are self employed you can deduct all expenses (medical, renewal, miliage or fuel to work). One difficulty with self emplyment is that if you were to have an accident, I would imagine the FI might be deemed liable by the club which most probably has limited company status. The solution here might be for the instuctor to register as a limited company, it can be done online for £15.00. This might protect the home and family. I think what happened to the Farage towing pilot. If there are any laywers on here, perhaps they can advise if this is correct.
If your a part time self employed instructor with a full time job, and say in you pay £7000 on a FI course, earn £2000 from instruction, so loss of £5000, I think you can offset that agains your taxable income. Infact, I would imagine quite a few part time instructors, could make a technical loss year on year.
Note that I am not an accountant so feel free to correct me.
One final point that I was going to flag up, is class one or class two medical. My take on this is that if there is no renuration then you can operate on a class two, which is quite a saving. So if your expenses are say £1500, income from instruction £1499, they you have really made a loss of £1, but had some fun from instruction. By expenses, I mean car running costs, teaching aids, pens, medicals, paperclips, renewals, additional ratings, % of domestic bills, flying clothing, PPE, sunglasses, the list is endless. The other thing to consider is being VAT registered, as it makes no difference to the school and you can claim VAT back on your expenses. VAT registration is not difficult, and you can manage it on Excel easily. Don't opt for the fixed rate which tradesmen use as they are afraid of paperwork and spreadsheets.
So if your not making a profit from part time instructing is that deemed renumeration, just covering expenses, it would be interesting to know if this is deemed non numeration hence you can fly on a class two medical. Any ideas.
Please if you are considering any of the above get professional advice from HMRC or CAA and get it in writing. Do nor depend on goverment advice lines, as like the CAA they often do not know what they are talking about. I remember being advised on the phone from HMRC, that I needed to charge VAT for goods and services supplied in Switzerland. the HMRC advisor, was convinced that Switzerland was in the EU!!!!!