Keeping HMRC off your back when employing contractors.

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