What are you doing about your contractors?

If your company engages contractors to provide ongoing services as of 6th April 2021 the IR35 rules have reformed. That means that you're now responsible for collecting and paying all the tax and National Insurance payments for anyone who qualifies as an 'employee'.

This generally applies to medium-sized and larger organisations who engage contractors on long-term contracts. Even if the contractor trades as a limited company (a personal service company - PSC), a limited liability partnership, a managed service company or an individual, if they carry out work that could be done as an employee, you may need to change their status.

What makes a contractor into an employee? 

There's a long list, but these are some indicators. The contractor gets:

  • Holiday pay
  • Sick pay
  • Maternity/paternity leave
  • A laptop or phone provided by the company

Also if they have to work specific hours in line with other employees. 

These are just a sample, but probably the more common criteria.

What about outsourcing contractors management?

Some large organisations faced with the issues around IR35 took a step back and have begun to use umbrella companies. This very effectively offloaded some of the responsibilities for tax and Ni to another organisation. These agencies effectively operate as a recruitment agency providing temporary staff - even if 'temporary' has no end date.

However, the ultimate responsibility for assessing the tax status of the end sub-contractor still lies with the contractor. So even if you use an umbrella company you still need to be sure they are correctly applying the rules when it comes to paying your sub-contractors and deducting the correct tax and NI.

Contractors who work for more than one employer

It used to be that, if a contractor worked for more than one employer, it proved their status as a bona fide contractor providing services to multiple clients. However, that no longer applies.

Whether the contractor is an individual or part of a small company or a consultant providing services to various clients - if the work they do for any one company falls under the IR35 rules, they can still be categorised as an employee.

The bottom line

If your company employs contractors either directly or through a third party you are responsible for reviewing the terms of each contractors engagement and, if you don't take action, you'll have HMRC breathing down your neck.

If your response is to simply stop engaging contractors, bear in mind the gaps that may create as you lose access to specialist knowledge and skills, as well as the fact that employees are more expensive and have significantly more rights and benefits.

It's sensible to invest the time and effort in reviewing how your contractors work.