Contractors’ Questions: How to expand without becoming an employer?

Contractor’s Question: For a new client I’m speaking to directly, I’m considering engaging a number of my contractor contacts to help my company execute the client’s project. But none of my contacts want to be employees of my company and I wish to minimise red tape while not employing them. How do I action this plan for me to branch out without being hit by legislation, such as that governing Managed Service Companies?

Expert answer: The Managed Service Companies (MSC) legislation is intended to prevent schemes in which a number of contractors become non-director shareholders in a composite company, managed by the scheme provider. As your contacts would be engaged by your company and not become shareholders, the MSC legislation would not apply to you.

What you do need to be aware of, however, is falling foul of the Onshore Intermediaries legislation on ‘false self-employment,’ introduced in 2014. It strengthened the rules relating to employment agencies by focussing on whether the work is subject to the Supervision, Direction or Control (SDC) of the intermediary. An intermediary is defined as any person who makes arrangements for an individual to work for a third party or be paid for work by a third party. If your contacts are deemed to be under SDC they will be considered your employees and so employee levels of income tax and employers’ National Insurance Contributions will be due.

Bear in mind -- there is a presumption that SDC is present; the burden of proof lies with yourself as the intermediary. So if you want to continue with the arrangement you described, you need to keep full records of the contractors involved and submit an employment intermediary report to HMRC every three months. This would include:

  • The subcontractor’s full name, date of birth, gender, NI number and address
  • The reason why PAYE was not applied
  • The start and end date of the engagements, the fee, currency, and whether VAT was applied
  • The party paid by the intermediary (in this instance the subcontractor’s limited company details)

You should note that it is the intermediary closest to the client (i.e. your business) who bears the responsibility for submitting this data. As long as you do so, you could happily branch out without need to pay employer levels of tax.

The expert was Chris Bryce, chief executive of IPSE, the Association of Independent Professionals and the Self-Employed.

Editor’s Note: Related Reading -

Contractors’ Questions: Do HMRC’s reporting requirements cover pay data?

Contractors’ agencies alerted to imminent reporting requirements

Contractors’ Questions: Will HMRC’s reporting requirements apply?

Friday 15th January 2016