Should a Business require additional support while undertaking a large project, subcontractors can often be considered a more cost-effective option than hiring additional full time / fixed term employees. This is because they have no traditional employment rights such as having no entitlement to holiday pay, and when considering short term projects engagements with subcontractors can be less complicated to end than terminating the employment of a full time / fixed term employee.
However, when categorising the employment status of a sub-contractor it is often incorrectly presumed that sub-contractors are automatically defined as being self-employed.
Depending on the amount of restrictions placed on a sub-contractor, like for example a requirement to wear a certain uniform or a restriction on the ability to engage with other employers etc., a subcontractor may unknowingly be hired with an entitlement to the same rights given to a traditional employee. These rights can include an entitlement to be auto-enrolled into a pension scheme, a right to paid absences (ie. sick pay) etc. If a self-employed worker is found to be an employee, this could also result in a business / individual being severely penalised under the IR35 payroll rules.
IR35 was introduced by HMRC to tackle the issue of ‘disguised employment’. Disguised Employment is where businesses engage with self-employed workers, rather than offering an employment contract, in which they can become disguised employees.
In order to avoid the potential penalties of IR35, it should be crucial for any business that wishes to engage with sub-contractors, that they should first verify that the sub-contractor is considered to be to be truly self-employed as specified by HMRC.
Businesses should be aware that it would be considered irrelevant that a sub-contractor has worked previously under a self-employed status when deciding on their current employment status. When deciding on an individual’s employment status it’s the terms of the current engagement that matter.
One step you could take to reduce the risk of breaching the IR35 payroll rules is by checking if a potential sub-contractor is registered under HMRC’s Construction Industry Scheme (CIS). CIS is a set of special rules for handling payments for specified construction work that contractors make to subcontractors. If registered under CIS, a sub-contractor would be subject to deductions of 20% whereas unregistered sub-contractors would be subject to deductions of 30%.
In summary when considering engaging with sub-contractors, businesses should ensure that the contract for services does not restrict the freedom of the sub-contractor which may impact their self-employed status, and that sufficient checks are conducted on the employment status of all potential subcontractors. To ensure that the correct checks are made businesses should seek to avail of the CIS check on employment status, as such a check can support a business’s claim that they correctly applied the self-employed status to an individual.