Freelancer

Managing Business Risks with Contractor Contracts

Managing Business Risks with Contractor Contracts

The latest statistics from the Office for National Statistics reveal that self-employed people have increased to 15% of the workforce in the UK. Certain sectors such as construction, IT and technology are particularly affected by this trend, as working with contractors, freelancers and subcontractors are commonplace.

Benefits of Hiring Contractors or Subcontractors

Hiring a contractor or subcontractor to do a job can be very cost-effective as the company does not have to provide sick pay, holiday pay, maternity/paternity pay, pensions or other benefits.

Contractors and subcontractors also have a wealth of experience and knowledge that are often specific to a certain market or sector, so it’s often an ideal solution for expanding businesses to strengthen their position.

What are the Risks of Hiring Contractors or Subcontractors?

While contractors not being employees have certain financial advantages, companies must be aware that they also have to balance the risks that hiring freelancers can incur. One issue is that freelancers could be mistaken for employees by HMRC. Not being able to prove the opposite could lead to hefty fines and penalties.

Other main risks for businesses include:

  • Client ownership: Who owns the client: the contractor or subcontractor?
  • Notice periods: Having no notice period in the contract or agreement could help when determining your IR35 status, as employees usually get notice periods but not contractors.
  • Payment terms: Contractor contracts must clearly indicate any terms for payment that must be observed.
  • Responsibilities and liabilities: Contracts should outline what the contractor can and cannot be liable for.
  • Intellectual property ownership: For some sectors, it is key to consider ownership of intellectual property in contractor agreements in order to avoid further issues.

 

How Can I Manage the Risks of Hiring Contractors or Subcontractors?

By adopting a diligent approach to contractor management and making sure your contractor contracts are thoroughly reviewed, companies can easily manage the risks of hiring a freelancer/contractor, meaning that both parties can benefit from the agreement.

From an HMRC perspective, it’s important to make sure you can differentiate yourself from appearing as an employee by stating the contractor status clearly and have the correct documentation in order to keep HMRC off your back. To do so, it’s essential to cater for the IR35 issue within the contract itself.

Do you have all the correct documentation and contract terms in place? Take the first step towards better protection for your business by getting in touch today.

No Warranty No Clarity

This blog is part 2 of a series of 5 that is preoccupied with small business using contracts to avoid contractual disputes. Court is an expensive pursuit and building self-remedy or clauses into your contract, that are enforceable and offer solutions to problems that may arise is practically useful to small businesses. A considered contract can help you save money, time and effort.

Warranty in simple terms means performance. So outlining how the product or service will perform seems obvious but in many cases, the details provided are scant at best. In many cases, the contract generally fails to outline the key aspects of performance and in turn creates ambiguity. It’s this grey area that can lead to further issues, as during times of dispute, areas of uncertainty become points of discussion or argument.

This gets even more troublesome when there’s a returns policy or a maintenance/service agreement to support post installation or delivery. Stating what is covered by the contract with regards to the basic product’s functionality is one thing but when something breaks or fails to work, what then? Remember these products or service are manufactured and delivered by humans, so things happen, the important thing is outlining what happens next?

Going to the trouble of employing the right contract drafter to ask the right questions and create a contract that is designed to help both parties work together long-term, is worthwhile. Contracts are avoided by those who see no need for outlining the negatives…..but knowing what might happen in the event of….is arguably good customer service and is considerate to both you and your customers time and energy.

The next blog will focus on intellectual property…..

Contractor and IR35 myths debunked

As you head to work on a Monday morning do you ever stop to think how many of these people rushing past actually work for themselves?  Recent ONS figures show that over 730,000 people are self-employed, the highest figures since records began 40 years ago.

Since the economic crash in 2008 people have jumped at the chance of self-employment – which brings freedom. You can be your own boss and reap the rewards of your own hard work. And as you grow it gives you the opportunity to take on more people to help build your business.

With 47% of university graduates forced to take non-graduate jobs, freelancing or self-employment is becoming a popular option for those fresh out of university.

Those in the technology and media industries have a wealth of opportunities to become freelancers and will be part of a strong business group that continues to grow steadily.

It is now common practice for businesses to hire a freelancer, or contractor as they can be known. Not only can they be more cost effective but they also have a wealth of knowledge and experience which can be extremely attractive to an expanding business.

A report by the Recruitment and Employment Confederation revealed that the majority of UK employers plan to hire more contractors, for both short-term and long-term job contracts.

Despite contractors receiving no sick pay, holidays or pensions, many consider freelancing a lucrative option as they can demand a higher rate of pay.

However, a recent number of cases has flagged up the need for freelancers to differentiate and protect themselves, not only to manage the liability within the business but to clearly define the relationship between both parties regard HMRC IR35 regulations.

In 2009 Dragonfly Consultancy Ltd lost their case against HMRC and were ordered to pay £99,000 in backdated taxes. John Bessell was contracted by AA to become a systems tester between 2002 and 2003 but after a judge deemed that clauses in his contractor agreement were added to get round IR35, he was forced to pay.

Essentially the aim of the IR35 legislation is to ensure that individuals are working as a contractor rather than an employee in order to reduce their tax liability and National Insurance contributions.

If you are caught then you can face paying years of backdated tax, obviously not a good option for a university graduate with student loans.

Issue like who owns the client and client contact, payment terms and the issue of the ownership of intellectual property are key in a contractor agreement.  A diligent approach to contractor management will help the company manage the risk of hiring a freelancer or contractor and allow both parties to benefit from the agreement.

From a HMRC perspective it’s critical that both parties differentiate themselves by catering for the IR35 issue within the contract.

 

Common contractor myths debunked

                                                                                                    

  1. I don’t get holiday or sick pay so I am not an employee.

Whilst getting these benefits obviously points towards being an employee, it isn’t enough proof, in terms of IR35, that you are not an employee. IR35 regulation requires further differentiation apart from sick and holiday pay.

  1. In terms of IR35, the regulation applies when I have been working as a contractor with the same company for 2 years.

IR35 depends on how and who you work with on a contractual basis. The day to day client engagement and the shape of that relationship is much more important that how long you have been working in one place. The perception may be that the longer you work somewhere the more likely you are to be deemed as an employee, and HMRC may use this information when assessing your employee status.  Again, the risk of this issue can be managed in a contractor’s agreement.

 

  1. I have other clients so I am definitely following IR35 regulations.

It is important to remember that IR35 applies to each individual commercial contract. Having more than one client helps to show that you are on the right side of IR35 however there is other criteria to demonstrate IR35 compliance. The majority of this criteria is echoed in the contractors’ agreements.

 

 

The UK economy benefits from those who can code…its the time of the techie.

The techie is playing a large part in the UK economic growth.  In the past engineering and electronics were the innovators and they helped grow both the UK and Global economy.  Now the Internet and technology sectors both in the UK and globally are set for huge growth, with more and more small businesses getting to market providing high-quality web-based solutions or online retail including Apps and software for both businesses and consumers.  An article from the Guardian reported on a Boston Consulting Group report stating figures that showed the internet economy in the UK accounting for 8.3% of GDP. The UK’s closest rivals are South Korea on 7.3% and China on 5.5%, followed by Japan and the US on 4.7% each.  By 2016, the internet economy is forecasted to grow to 12.4% in the UK, contributing some £225bn to the overall UK economy.

With regards online software itself, an article on Forbes.com from last year states some staggering statistics on projected global sales of online software, Software as a Service (SaaS) and cloud-based business application services will grow from $13.4 billion in 2011 to $32.2 billion in 2016, also an IDC report comments that enterprise cloud application revenues reached $22.9B in 2011 and is projected global sales to reach $67.3B by 2016.  IDC also predicts that by 2106, $1 of every $5 will be spent online is spent on cloud-based software and infrastructure.

According to the BBC website the “internet economy” was worth more than the healthcare, construction or education sectors.  The UK also carries out far more retail online than any other major economy.  Some 13.5% of all purchases were done over the internet in 2010, according to BCG, and this is projected to rise to 23% by 2016.

David Reilly, Director at Create Ts and Cs commented, “the techie is a huge focus for us.  Our aim is to communicate with future developers; assisting them to put in place a web-based or developer based contract so these important people in our economy are protected when trading. We want the buyers to have confidence and this will come from a sense of protection.  A solid sensible set of terms and conditions that adheres to the law and extends the buyer their rights is one way of increasing that confidence”.

He continues, “We are delivering numerous talks at the University of the West of Scotland, New Start Scotland and a variety of business and university events.  These future businesses require a practical approach to manage contractual risk, so they can contract with both consumers and businesses while adhering to the law and offering the correct protection/rights, (avoiding unfair terms) to both consumers and businesses”.

Evelyn Fitzpatrick a Teaching Fellow at the University of The West of Scotland commented “Create Ts and Cs, David Reilly, has given a number of talks on contractual terms and conditions to our UWS Creative Technology students. His talks have been interesting and very well received by students.  David manages to present what is a highly technical subject in a relaxed and engaging style.  He combines content demonstrating legal principles with examples from case studies based on his own experience to give students a real insight into the contemporary business world.”

With ICO and trading standards ever vigilant it’s important to protect your business by deploying the correct terms and conditions, offering consumers and business the correct legal rights when trading over the net.   Technologists tend to require a lot of contracts as they generally using freelancers and trade online, offering multiple services.  If techies take the time to deploy the right contracts, it builds the right rapport with the future client whether a consumer or a business and helps the net to expand while offering the correct rights to the purchaser.  The net, arguably will grow and mature (without further regulation) with the correct protection in mind for all concerned.

Keeping HMRC off your back when employing contractors.

If you are self employed, then you’re part of a significant growing trend, the latest statistics from the Office for National Statistics show that a record 4.1 million or 14.2% of the entire workforce are self employed.

As your business develops, it’s not uncommon to consider expanding the headcount.  With a variety of pressures on business owners and the perception that employment law is complicated and employing a staff member costly, more and more companies are deciding to hire contractors instead of taking the option to employ staff.

However, a recent number of cases has flagged up the need for both parties to differentiate and protect themselves, not only for the company to manage their own liabilities but to clearly define the relationship between both parties regard HMRC IR35 regulations.

A recent 7 year dispute that concluded in 2011 involving Airbus UK and reported in lexology.com, demonstrates how HMRC challenged the relationship between Airbus UK and their contractors (self employed persons). HMRC deemed the relationship to be that of an employer to employee.  A negative outcome for either party would result in back dated tax, national insurance and employee related costs to be paid to HMRC.

The Tribunal found in favour of Airbus due to contractual clauses signed by both parties. What is scary is the length of the dispute and resources required to engage in such a dispute, once again demonstrates the complexities of IR35, but also highlights the importance that the courts place on the factual reality of the relationship between the parties. Whilst both contractor and company can strengthen their case by ensuring that their relationship is documented within a contract, it is essential that a contract reflects the ‘reality of the relationship’.

David Reilly, Director at Create Ts and Cs, who provides the service of bespoke contracts to companies who intend to work with contractors commented “It’s critical to protect the business by deploying the right contract when working with contractors, after all from a company perspective, it’s your end client and the work carried out must be of a standard that reflects your business.

He continues “From a HMRC perspective its critical both parties differentiate themselves by catering for the IR35 issue within the contract.  Also, both parties should enter into a contract that reflects their capacity to deliver, skill set and capabilities; it’s about achieving a balance.  This is best reflected in a purpose drafted contract specific to the companies involved”.

Dave Telling, Accountant and Director at Accys also commented “The problems with employment status begin when HMRC start asking questions, which is generally several years after the contracting commences.  If you don’t get it right at the beginning, the Revenue may well succeed in proving you’re an employee and you will have years of tax and national insurance to pay at once – an expensive mistake.”

Another important way of differentiating both parties is through each party acquiring their own public liability and indemnity insurance, which is also reflected in the contract between the companies. Chris Knight of Business Protect, an Insurance Brokerage says “If either party is working away from home, possibly within a client’s premises they should consider Public Liability Insurance of at least £2,000,000. If they are providing advice or their work may be subject to Errors and/or Omissions, then Professional Indemnity Insurance will be required”.

Chris continues, “It is becoming more common for the company to insist the contractor acquires their own insurances, after all they are a separate company or sole trader with their own requirement to protect themselves and cover their liability”.

It’s clear there are a number of precautions to be taken when hiring a contractor.  The steps you take to protect both companies will help ensure the experience is both a positive and profitable one.

 

Create Ts and Cs provide a bespoke set of Terms and Conditions for your business at a fixed price, this unique approach to individualising commercial Terms and Conditions allow Start up and SME sized businesses the opportunity to protect themselves, manage risk and guard against future unnecessary disputes at an affordable price. Download: terms & conditions | privacy policy