How do I supply IT contractors?

Contractor's Question: I may have an opportunity in the coming months to recruit a few contractors to help me out on IT projects run by former clients of my limited company. This may become a sideline 'Plan B' business but, if I went ahead, at what stage would I become an Employment Agency? What is the most tax-efficient, legal way of me, a limited company owner, supplying IT contractors other than myself? And if I must become an 'agency' for such a business, what do I need to do in order to set up as an agency, and are set-up costs likely to be prohibitive?

Expert's Answer: You could be classified as an "Employment Agency" when you act as an:

"employment agency" introducing contractors to a client who then contract directly (i.e. like a recruitment consultancy); and

"employment businesses" entering into agreements with contractors so you supply their services to the client (i.e. like an agency company).

If this occurs, you will fall under the Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Business Regulations 2003. This legislation would require you to ensure certain paper work is in place and vet the contractors/assignment.

By way of paperwork, any agreement with the contractors must be in writing. You must also give the contractors certain information (e.g. the identity of the client, the type of work, hours, qualifications required, notice, the timing of any payment, holiday and the expenses) before you introduce them to the client. Your agreement with the client must also be in writing. Again this must include certain information (e.g. the details of any fee the client must pay and the procedure applicable if a contractor proves unsatisfactory). You must also notify the client about all of your charges if the contractor tries to cut you out and work direct, which will be restricted to a limited "quarantine" period.

When vetting a contractor, you must confirm their identity and that they have the qualifications/training/experience/references required. You must also make enquiries to ensure that the assignment would not be detrimental to the contractor or the client. This extends beyond health and safety to matters such as the finances or practices of the client.

The law allows for an opt-out from the above legislation when a contractor is a limited company. To properly opt-out, the contractor (and their service company) must have given notice of the opt-out and the client must have been informed of the opt-out before any contract starts.

The above obligations are in addition to any other tax or employment obligations. The contractor may be your employee for tax purposes and taxed under the PAYE system. You may then be liable to pay employer's National Insurance Contributions, making it more expensive than using a self-employed person. Legislation also provides that agency workers will be taxed as employees if they supply their services personally and are subject to control by the client. If the contractors operate via a service company, IR35 may also apply or you may be viewed as a managed service company, meaning all sums received may be subject to PAYE and NICs. In addition, it should be noted that businesses involved in the supply of staff must now account for VAT on the full amount of the value of the supply. All of the above potentially increases your tax burden.

Should you be looking to expand your business by supplying others, the simplest way is to subcontract to other service companies and apply the opt-out. If the terms of engagement are correct, this should avoid the above and also ease the potential tax burden.

The expert was David Buckle, head of the employment practice at Cubism Law.

Wednesday 2nd Jun 2010
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