Contractors' Questions: How to subcontract some work?
Contractor’s Question: I’d like to subcontract some work to a contractor-friend I know for my client’s new project. But I don`t want this other contractor – who’s also a limited company - to invoice the client directly, I will pay him and his company. How would this set-up work for tax purposes; what about declaring it in my tax return and are there pitfalls?
Expert’s Answer: There is no problem about you invoicing your client for your sub-contractor`s work. In fact, it reinforces your status as being an independent consultant.
When both you and your sub-contractor are operating through your own personal service companies (PSCs), the first thing is to ensure that you or your sub-contractor is not subject to Supervision, Direction or Control (SDC) by anyone. If the sub-contractor is subject to SDC (or “the right of” SDC) of the client (or another party in the contractual chain), your PSC should account for PAYE and NICs on the income that the client has paid for the services of the sub-contractor.
But if the sub-contractor is not subject to Supervision, Direction or Control, and the onus is on you to demonstrate this to HMRC if queried, then you may pay him or her gross.
You need to be meticulous and must consider the Agency legislation (see guidance on the legislation on HMRC’s website), Managed Services Company legislation and IR35, by making sure that none of them is invoked. Some PSC-aimed guidance from HMRC is worth reading.
Remember; agency legislation prevails over MSC and IR35. After the changes made in the agency legislation from April 6th 2014, a PSC set-up by the temporary worker can also be considered as an agency. It is not necessary that only the employment business or recruitment business will be considered as third parties who provide workers to clients, under the agency legislation. Hence, you need to watch all three legislative frameworks.
Where the PAYE and NICs debts of a MSC cannot be recovered from the company, HMRC may transfer the debt personally to one of the following:
- the company`s director
- the MSC Provider
- other third parties.
As regards preparing your accounts and tax return, the revenue you are going to generate with your sub-contractor becomes the trading income of your limited company and the payments made to your sub-contractor will be a cost of your sales.
The expert was Kevin Austin, director at Access Financial, a tax and accounting specialist serving contract professionals.
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