Can I subcontract my work to a fellow contractor?
Do you have multiple contracts and too much work to do? A good problem to have and one that is perhaps solved by hiring a subcontractor to help lighten your workload. This approach has its benefits, providing you with a flexible resource and access to skills sets as and when you need them. But hiring subcontractors also comes with some responsibilities, one of which is to comply with tax and National Insurance Contributions obligations, under the guidance published by HMRC in September 2015.
What is an employment intermediary?
If you supply other contractors to complete work for your end client, you fall into the scope of being an employment intermediary. As the contractor who is subcontracting you will typically assume overall responsibility for the project and will receive the subcontractors’ fee from the client on completion, before paying the subcontractor directly from your own company.
HMRC describes an employment intermediary as a person or business who makes arrangements for somebody to carry out work for a third party. It goes on to state:
“You’re an employment intermediary if you supply workers to work for an end client or another employment intermediary, and the client then pays you or someone connected to you for the worker’s services. The end client is who the worker does the work for.”
Why does this matter?
When you take on the role of employment intermediary you become liable for employment rights and debt transfer risk from your end client. What this means is, should the worker you have subcontracted be found not to have paid their correct tax and NICs, you may become liable for any outstanding debt. This means it is vital that you adhere closely to the guideless when subcontracting.
So, what do you need to do?
Well, that depends on whether the engagement with your subcontractor is deemed to be one of employment or not .
For employment intermediaries, where you have engaged subcontractors rather than employees, special agency rules apply, known as the agencies legislation. Like assessing IR35, you need to be sure that the actual relationship between you, your end client and your subcontractor is an independent one and not disguised employment. If these rules apply, then your company, the intermediary, must treat the worker as if they were an employee and deduct income tax and NICs via PAYE rather than simply settling their invoice.
You will need to apply these rules and operate PAYE if your subcontractor is deemed an employee. For this to happen four conditions must be met:
· Personal service must be required
· There must be a contract between your end client and your company
· The subcontractor must be subject to the right to “supervise, direct and control” (SDC)
· The subcontractor’s fee must not already be subject to employment taxes
If your subcontractor passes the tests and is providing their services without anybody having the right to supervise, direct or control (SDC), or if personal service is not required then you will NOT have to operate PAYE.
Whilst you may not need to operate PAYE, you are required to regularly report on your subcontractors to HMRC. On a quarterly basis, as the contractor you need to send HMRC the following information:
· Full name, date of birth, gender, NI number and address of your subcontractor
· The reason why PAYE was not operated
· The subcontractors Unique Taxpayer reference (UTR)
· The dates within which the contract runs
· The fee, currency and whether VAT is included
· The party paid by you, in other words the Limited company name
A template is available to allow you to readily report this information via an online upload service.
What are the consequences of non-compliance?
You must send HMRC your reports, by each reporting period’s deadline or you may receive a penalty. The deadline is one calendar month from the end of the reporting period.
6 April to 5 July
6 July to 5 October
6 October to 5 January
6 January to 5 April
If your report is late, you will automatically receive a penalty. The number of offences in a 12 month period impacts the penalty amount.
The amounts are:
· £250 - first offence
· £500 - second offence
· £1,000 - third and later offences
If you submit a late report, but at least 12 months have passed since the last time you were late, it will be treated as a first offence.
If you submit a report that is incorrect, penalties may apply. An incomplete report, for example a report where any information is missing, will count as an incorrect report. Penalties for incorrect reports will be determined on a case-by-case basis.
If HMRC finds that you should have submitted a report and you have failed to do so, you may also receive a penalty.
Where there is a continued failure to send reports, or where reports are frequently sent in late, you may receive a penalty of up to £600 every day that you are late.
How we can help
These rules may seem complex, and it can be expensive if you get things wrong but if you find you need that extra help and want to engage a subcontractor, let one of our accountants know and we can make sure you follow all the rules giving you peace of mind that not only is your client happy, you have met your obligations as an Employment Intermediary.