Contractor or Employee – You Decide
If your business uses a contractor, now is the time to carefully consider if they are really an employee. From April 2020, businesses with more than 50 employees or a turnover of £10.2m need to clearly establish which one is correct.
Why is this important?
It is estimated there are around 500,000 personal service companies (PSCs) operating in the UK. The worker charges for their work through their PSC. They pay less tax and National Insurance.
There is concern that some contractors should truly be classed as workers. The trouble is, HMRC has not had the resources to police this fully so changes are coming.
From April 2020, the burden of categorising the contractor’s tax status will fall on the Company. Get it wrong and your company could face huge costs. The payment the contractor has received may be treated as net wages. This may be grossed up and you may be responsible for paying the tax and National Insurance. You could also face a significant fine.
How do I check if a contractor is really an employee?
You could find that someone you took on as a contractor some time ago has slipped into becoming an employee. Maybe they were really good so you started using them more. Now they work for you full time and on different jobs. They’ve been with you for ages. You have no intention of them leaving your business and they don’t work elsewhere. Sound familiar?
If you use contractors, you need to start looking at this now.
- Identify any contractors you are using. Do you have anyone who provides their services through a PSC or regularly bills you for their time?
- How much autonomy do they have in terms of how they deliver a project? If they have little or no control, it may indicate they are employed.
- Do they have the right to substitute someone else to do the work in their contract?
- Is there “mutuality of obligation”? In other words, is there an ongoing requirement to offer and accept work? An open ended contract where the worker is asked to perform different tasks looks more like employment.
- Importantly, what actually happens in practice? Don’t just look at what the contract says.
- Go to https://www.gov.uk/guidance/check-employment-status-for-tax as a secondary check. Keep a copy of the outcome for your records.
How do I change from contractor to employee?
Once you have identified which contractors may actually be employees, consider making them an offer of employment.
Many people have chosen to be a contractor for tax reasons. If they now need to become an employee, expect they will want their pay to increase so their take home pay is the same. Please speak to your accountant to help you calculate this.
When you are ready, speak to the worker concerned. If they are not willing to become an employee, you may need to consider whether you can continue to use them after March 2020.Categories Uncategorized