Are you a business which uses subcontractors?

As we are all probably aware, H M Revenue and Customs (HMRC) regularly attempts to review the status of individuals working as subcontractors and it is normally attempting to argue, frequently very aggressively, that the individuals should be treated as employees.

It is the business’ responsibility to correctly classify an individual as either an employee or a subcontractor and the cost to a business of not getting this right is that it can become liable for the PAYE and employees’ National Insurance which it should have deducted from the payments made to the individuals, if the amounts paid should have been treated as wages rather than subcontract payments.  The business also becomes liable for the employer’s National Insurance contributions which it would have paid.  Interest and penalties would also be levied by HMRC.

If the subcontractor who has now been reclassified as an employee has correctly paid National Insurance and Income Tax on their earnings, then there are sometimes set-off arrangements for the sums which have already been paid.  Even then the business is normally facing some very substantial costs, particularly if the individuals concerned have been working for the business for several years and the change in their status is backdated until they first joined.

It is vital to have written agreements in place setting out the arrangements between the business and the subcontractor and there are a number of key features which have to be included in the agreement if there is to be any realistic chance of HMRC accepting that the individuals are subcontractors.

However, it is not only a question of the written agreement setting out appropriate terms of the arrangement, but that also has to be what actually happens in practice.  There is previous case law in this area, some of which concentrated on Employment Tribunal issues rather than tax cases where subcontractors tried to argue that they had really been employees (and should have been treated as such) and would therefore be entitled to all of the protections provided by the various aspects of Employment Law.

Some of the factors which it might be suitable to include in an agreement between a business and a subcontractor, to have a chance of agreeing a non-employment situation, are as follows:

  • That the business has no obligation to offer any work at any time to the subcontractor;
  • The subcontractor is not obliged to carry out any work which he or she is asked to do;
  • The subcontractor can send along a substitute to carry out the work on his or her behalf if they are unable to carry it out themselves;
  • The subcontractor is responsible for providing his or her own tools and equipment;
  • The subcontractor is expected to put right faulty work at his or her own expense;
  • No payments are due by the business to the subcontractor when the subcontractor is sick or on holiday;
  • The subcontractor is required to have his or her own public liability and other appropriate insurances.

This is not an exhaustive list of the types of clauses which need to be included in any agreement, nor is there any guarantee that the inclusion of such clauses will satisfy HMRC if what happens in practice is different to that described in the agreement.  The above does however give an indication of the sorts of issues which need to be addressed by all parties in such circumstances.  Moreover, advice from a solicitor who has experience in this area should be sought before agreeing the wording of any such agreements.

The above is for general guidance only and no action should be taken without obtaining specific advice