As a businesses grows and the workload becomes too much for one person some form of help will be needed. The options tend to boil down to taking on an employee or engaging subcontractors. Each business will have different factors that influence which option to aim for. Typically subcontractors are the goal as it reduces commitment and complexity. It also tends to provide a positive tax outcome for both the contractor and the subcontractor….and it's because of this that HMRC take an interest. They will want to ensure the correct status has been applied and in turn tax paid in line with this. If errors are made they can be costly resulting in backdated assessments to when the error began with penalties and interest potentially charged on top. Very quickly this can run into thousands.
So how do you know if someone is an employee or a subcontractor? A number of points will be looked at. A few examples are:
(There are considerably more points that would need to be reviewed but this is a helpful starting point).
Regularity - the more frequently the subcontractor is engaged the greater the risk can become. Even if it's just one day per week. If this continues week after week for a prolonged period of time the situation should be looked at carefully. You'll often hear people say "it's easy to get round this, just don’t use the subcontractor for a few weeks or a month". In reality this is very unlikely to fixed the issue if a pattern of employment has already been established. It's essential to consider each and every case and it's unique facts.
Obligation to accept or provide work - This is known as 'mutuality of obligation'. When you think of an employee, they are expected to turn up for work and complete the work assigned to them. Likewise the employer is expected to provide work (along with payment). Whereas self-employment is much more flexible. In genuine subcontractor arrangements the main contractor is under no obligation to offer work and equally the subcontractor is under no obligation to accept it. When reviewing this area it's important to distinguish between efforts to maintain good business relationships and obligation. For example a subcontractor may inform a particular contractor that they will be unavailable for certain periods of time, such a when their own work is busy or they will be away. This is done out of curtesy to allow the main contractor to plan their work and make other arrangements. On the other hand if the contractor expected the subcontractor to request specific dates to be away and even attempted to limit these they are imposing obligations to accept work, indicating employment.
Ability to profit (and suffer losses) - Self-employed individuals should be able to profit from the good management of their work or suffer a loss if things don't go well. On the other hand an employee paid an hourly rate for 8 hours per day will get the same regardless of how quickly (or slowly) they complete the work. A self-employed individual has the ability to quote a price for a job and this will be paid regardless of the hours taken. Understandably once a subcontractor is engaged this can complicate things as different industries will have different practices and even the nature of the work can affect what is the most commercially realistic way to price / pay. Arrangements should be looked at closely to understand if they would support self-employed status.
Required to provide equipment - Employees would rarely be expected to provide their own equipment to carry out the work they have been employed for. The employer would provided them with the necessary equipment and tools. On the other hand self-employed individuals would be expected to provided their own equipment. Could you imagine getting a tradesman in to do some work on your house and they turn up asking where the tools are. Or booking a taxi and they ask to use your car. In a similar way if a subcontractor is required to provide their own equipment this would indicate genuine self-employment. On the other hand if they turn up, use the contractors tools, equipment and vehicle this would contribute to the risk of them being classified by HMRC as an employee.
Integrated into the business - This can result from a number of things but ultimately you want to consider how the person is viewed by other employees (if there are any) and customers. For example in an office environment if they have their own desk, possibly a dedicated phone line and are invited to work social events you would considered them very well integrated. This would indicate they are an employee. In other examples it could be how they are introduced to customers and if they are expected to wear your businesses branding etc.
These are just a few examples of areas to consider. When looking at the status of subcontractors it is important to look at the entire picture. It would be unusual for the decision to be made entirely by any single factor. Then with good planning appropriate measures can be put in place to minimize the risk of subcontractors being reclassified as employees, bringing with it backdated tax assessments along with penalties and interest.
If you would like to discuss how we can assist you in evaluating risks in this area of your business please give us a call or send a message.
