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Every now and then, you may find that your company needs additional skills or support to successfully deliver an assignment or project. This means you may need to bring in a third party to assist you.
However, in doing so you could open yourself up to some potential tax and legal pitfalls surrounding the employment status of the engaged party – are they a subcontractor or an employee?
First of all, the easiest option from the engager’s point of view is to contract a limited company.
You, as the “engager”, don’t need to worry about the employment status of the limited company you’re subcontracting work to – they’re simply ‘subcontractors’ in your accounts. They may have IR35 considerations if the work involved would otherwise be considered that of an employee, but it’s up to them to determine their employment status and apply the IR35 legislation.
This is why many larger companies will only subcontract work out to limited companies – it makes their administration safer and easier. The rules surrounding IR35 will be changing in April 2021, however, so do not underestimate the importance of understanding IR35.
If you subcontract work to an individual, you’ll need to pay much closer attention to their employment status. If you incorrectly determine they’re a sole-trading independent contractor and HMRC (or the courts) deem that their work was actually that of an employee, then it’s your responsibility as the ‘engager’ to settle the unpaid PAYE and National Insurance. In addition, there may be late payment fines and other penalties for the incorrect submission of your company’s PAYE returns.
HMRC have given some guidance on this, but it’s still a case-by-case decision and employment status cases still regularly reach the courts to decide the outcome.
Essentially, it all comes down to the definition of the contract – is it a contract of service (employee) or a contract for services (self-employed, independent contractor)? The actual name of the contract is not important here, it is the reality of the situation (similar to IR35).
If the answer to all the following questions is ‘Yes’, the worker is probably an employee:
If the answer to all the following questions is ‘Yes’, it will usually mean that the worker is self-employed:
Whether an individual is an employee or a self-employed independent contractor not only determines how tax is applied but also relates to the various rights that employees have that contractors don’t. This is a legal definition that’s based on past and emerging case law. It’s not a definition set by HMRC – they only provide guidance.
Please note, getting this wrong can be very costly to your business both in tax/fines and legal fees.
At Crunch, our experts can help you with IR35 whether you’re a contractor, employer, or recruitment agency. Find out how Crunch can help you successfully navigate IR35 legislation at our IR35 Hub, or book a callback with our specialist advisors today.