Guidance for Subcontracting to Self Employed / Sole Traders / Freelancers and Limited Companies
Extra demand for your business is exciting and rewarding but also a headache if you’re doing most of the work yourself. Depending on the nature of the extra work, and whether it is going to be all the time or every now and again, you may be thinking about getting a part time employee, a full time employee or perhaps subcontracting the extra work.
So we thought we’d give you a summary of the main questions to address to help you determine the correct status. We always recommend doing your own research on this but to start you off, so you’ve got an idea of the scope we’re talking about here, and some of the jargon, we’ve done our best to give you an overview. And included a couple of checklists and also a link to the HMRC ‘tool’ to help you remain the right side of the law and the tax office.
The legal status of the people that help you in your business is critical. Even if you don’t pay them and they are volunteers, you are still responsible for their health and safety when at work. Also if you use freelancers who are self employed, you might find yourself viewing them as part of your team, treating them almost like an employee, even though they are freelancing/contracting. This is especially easy if they don’t work for anyone else and seem really keen to give you commitment and energy as well as their allotted hours. This blurring of the boundaries is of interest to the tax office or an employment tribunal who might well deem your extra pair of hands as employee status, with the relevant National Insurance, health and safety, minimum wage, holiday and sickness pay plus tax commitments.
If you continue to work with individuals as self employed/freelancer/sole trader and you do not class them correctly as far as their status is concerned, and HMRC or a tribunal determine you’ve not got it right, there will be PAYE and NI to pay (backdated) and possibly fines for incorrect submission of your company’s PAYE returns, as well as other aspects such as backdated holiday pay and sickness pay.
So how can you protect yourself?
Let’s start with the contract.
Anyone who works with you should have a contract. Once you’ve decided which category they fall into, you MUST supply a contract for them. Whether for fixed term or not, you still need one. This is to protect you AND them. There are two main types. Contract for services and Contact of Service.
- An employee-employer contract is a contract of service
- A contractor-client contract is a contract for services
This is a start but it’s not the whole picture. You can determine which you believe is the correct contract but if the aspects below are not, in an employment tribunal’s opinion, consistent with the contract, they can over turn your decision and make a ruling. Which will have costly implications for you. Most of these cases are when people are being re classified as employed from a self employed status.
In each of these types of contract, both parties have specific rights and responsibilities, which differ according to the type of contract in place. It’s best to talk to an employment adviser on this to set up your contracts, much better to be safe than sorry we’d say!
Here’s some factors that the revenue and tribunals consider:
- Tools/Equipment. Does your freelancer use their own equipment?
- Independence vs ‘Master/Servant relationship’. Are they working independently? Independence is seen as a major aspect of self employment/contract/freelance work.
- If they are ill or unable to work the allocated hours, can they substitute someone else to do the job for them? Is this clear in the contract and DOES IT HAPPEN IN PRACTICE?
- Hours of work and location. What hours are they working and where? They should only work the hours they are paid to do – ie that they invoice for. And if you have employees, if they work the same hours, from the same place as your employees and to the untrained eye, might be mistaken for an employee in the workplace, your distinction is not clear enough.
- Branding. Uniform and company vehicles. Do you require them to wear a uniform or drive the ‘company van/car’? This is obviously another grey area but it’s something you need to consider as this has been a factor in cases in the past where, when combined with other factors, the self employed person was deemed to be employed.
This is not a cut and dried situation although the guidance is becoming more readily available. We would encourage you to read the advice on the HMRC advice about this and they have a checklist tool which, if you complete and then get a case brought against you, the backdated payments are only from that point of the completed questionnaire aid, as it showed you were trying to follow the law.
The questionnaire is called CEST (Check Employment Status for Tax) and the link is here
IR35 – do you work with contractors who are registered Limited Companies?
It’s not unknown for an employer to change someone’s status and ask them to become a limited company to prevent unwanted tax or employment rights issues for their staff. This is a loophole that has been closed.
New regulations concerning this came into effect in April 2021, you might have heard of IR35? If not, you have now!
HMRC introduced IR35 to help them generate the tax owing to them when people are registered as limited companies but are in fact acting as if they were employees and being paid accordingly. Employment lawyers also help people claim for backdated benefits that would have been theirs had they been classified as employees (and acting as if they were) but told they were self employed/freelance.
We would encourage you to use the checklist tool mentioned above.
The questionnaire is called CEST (Check Employment Status for Tax) and the link is here:
As with many things, there are nuances, and there’s jargon too so we’re giving an overview here but if when you’ve read this you have any questions about your specific situation, (even if you are not a client) we are very happy to talk you through your specific situation so please do get in touch with David on 01763 257882 or email David@theaccountancypractice.com
IR35 and subcontracting to Limited Companies. Who does this affect?
The size of your business determines how much responsibility and checking you are required to do when you subcontract to a limited company. If you are small business you can ‘trust’ that the limited company is as they say.
This is not the case for larger businesses, so many medium and larger employers are having to seek extra evidence for their limited company contractors (both new and current) who have been operating as a limited company, to protect themselves as an employer. Even if they are using a recruitment agency. This is following the introduction of the IR35 rulings earlier this year.
So you really do not want to make mistakes here. Here’s another way of helping you determine their correct status. We use the work probably because it IS a grey area, but this will help you. It’s a case by case basis with the courts. We’re just trying to help you avoid the most common pitfalls.
Would you answer yes to these, if so they are probably an employee?
- Does someone tell them where to do the work, when to do it, how to do it or in general ‘manage’ them?
- Are their hours generally fixed or do they vary from day to day/week to week?
- Does this rely on the person you’ve subcontracted to, doing the role and only them? Can they get someone else to do it? And does this happen from time to time with your freelancers?
- Are they paid a fixed amount by the hour, week, or month?
- Do or can they get overtime pay or bonus payments?
If the answer to all the following questions is ‘Yes’, it will usually mean that the worker is self-employed/sole trader/freelancer:
- Can they substitute someone else to do the role at their own cost?
- Do they risk their own money within their business? And pay their own taxes and National Insurance?
- Do they provide the main items of equipment they need to complete the assignment, and not just the small tools that many employees provide for themselves?
- Do they agree to do a job for a fixed price regardless of how long the job may take? ie no overtime
- Can they decide what work to do, how and when to do the work and where to provide the services?
- Do they regularly work for a number of different clients? ie not just you.
- Do they have to correct unsatisfactory work in their own time and at their own expense?
Please note: Whether an individual is an employee or a self-employed independent sole trader/freelancer not only determines how tax is applied but also relates to the various employment rights that employees have that contractors do not. This is a legal definition that’s based on past and emerging case law.
If you’re not sure about this, do get in touch. Let us hold your hand!
Here’s a link to the guidance from HMRC on the topic
And another link to the CEST tool for checking tax status
We hope this has helped you consider the issues that might be apply to your business?
If you would like to discuss anything relating to these issues we are very happy to talk you through, at no charge. Please call David on 01763 257882 or email David@theaccountancypractice.com