If you run your own business and become really busy, or if there is a piece of work you cannot do yourself, often another individual who works in the same or a similar trade would be hired to help out, known as a subcontractor. This isn’t the same as taking on an employee and overall there would be less tax and National Insurance Contributions (NIC) to be paid, as well as less paperwork and information to be submitted to HM Revenue and Customs (HMRC).
Since both employing someone and hiring a subcontractor are quite similar, HMRC will try to prove that you are employing the other individual rather than subcontracting out work. This is because having an employee means you will need to pay more tax. Should HMRC decide to investigate, it could become expensive, both in additional tax to be paid if you lose the case and in professional fees to defend yourself.
The best defence you can have is understanding the key differences between having an employee and hiring a subcontractor to help you. We’ve listed the differences below, allowing you to use them to ensure you can prove you have a subcontractor and not an employee without too much effort or cost.
How do they work with you?
Does your subcontractor bring their own tools? Do they decide their own hours and is there a set fee? If you decide when they work and provide their tools it will be shown that they are an employee. However if you answer yes to the above two points, then you can be safe knowing that this counts as subcontractor behaviour. Having a set deadline and standard of quality doesn’t imply an employer / employee relationship, so you can still include these in a contract.
How many clients do they have?
If your subcontractor does work for several clients, that will help convince HMRC that they are a subcontractor. If they only work for you it makes them look more like an employee.
Are they responsible for their actions?
If you are an employer your business insurance will cover the actions of your employees, whom you would be responsible for. However with a subcontractor, even though you would be responsible to the client, the subcontractor will have their own insurance. You will need to make sure any insurance owned by the subcontractor is clarified in your contract with them, as well as any confidentiality agreements.
Does the contract look like an employment contract?
Naturally when drafting up the contract with the subcontractor you will want to avoid using any terms that suggest employment, such as salary. In addition it needs to be clear that even though you are hiring that subcontractor, they are able to send a substitute in their place if needed, something an employee cannot do.
If you follow the above points then should HMRC come round and question whether or not the person doing work for you is a subcontractor or employee, you will be able to show that they are a subcontractor quickly and avoid any penalties. If it turns out that following this guide shows you have an employee, you can at least follow the steps to make the employment official and avoid any penalties before HMRC decide to investigate.
The above works both ways; if you are self-employed and do subcontractor work for a larger company, it would be useful to be mindful of the above so your own business is not disrupted by an investigation into the larger company you work for.
If you require any advice or assistance with the above, or need help setting up and running a payroll scheme, please do not hesitate to contact us.
