Outsourcing to Self-Employed Contractors?

Do you remember the big fuss about IR35 back in 1999?

It redefined self-employed people who only have one client as employees who are entitled to all the rights of any other employee, including holiday pay, sick pay and so on.

IR35 caught many IT contractors who were then working full-time on preparing for the ‘millennium bug’, as well as lots of people in the construction industry.

Today, the trend is for businesses to outsource more and more, both in the UK and abroad.

But the line between employment and self-employment is sometimes blurred.

Perhaps you outsource to a freelance virtual assistant, bookkeeper or web designer, whether in the UK or overseas?

Is your self-employed contractor an individual that operates as a limited company?

Do you know how many other clients your outsourced contractor has?

Should you be treating them as an employee after all?

Under HMRC rules, an employee is a ‘worker’ when:

  • They are contracted to work a set number of hours
  • You can move them from task to task
  • You pay them regularly even if there is no work available

If you employ workers, you pay their salary, plus any bonuses, commissions, sick pay, maternity/paternity pay, and so on.

You use their personal tax code and national insurance letter to calculate how much class 1 national insurance and income tax is due, and deduct it from their pay via PAYE.

If you outsource to self-employed contractors, they are responsible for paying their own national insurance and income tax. They can offset expenses against their earnings, which reduces their liability.

The government considers this a loophole, and has suggested that any self-employed contractor who works for a single business for longer than one month should be counted as a worker and put on the payroll.

No decision has yet been made, but if it goes ahead, it is likely to drive more outsourcing outside the UK.

A solicitor can advise whether your people are employed or self-employed, so you know whether or not you must operate PAYE.

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