Employee or subcontractor?
Whether you’re a small sole trader bringing in a worker for the first time, or you already have a full team of staff, there’s a lot to think about when bringing in someone new to work for you.
It also makes a significant difference from a tax and reporting perspective.
The first question to answer is whether your new worker is an employee or if they’re self-employed?
27th September 2020
Amy Dedman See profile
HMRC give the following indicators that someone is self-employed when:
- they’re in business for themselves, are responsible for the success or failure of their business and can make a loss or a profit
- they can decide what work they do and when, where or how to do it
- they can hire someone else to do the work
- they’re responsible for fixing any unsatisfactory work in their own time
- their employer agrees a fixed price for their work – it doesn’t depend on how long the job takes to finish
- they use their own money to buy business assets, cover running costs, and provide tools and equipment for their work
- they can work for more than one client.
These rules still apply even if your worker invoices you through their own limited company – these are known as ‘IR35’ anti-avoidance rules, which are expanding in April 2021.
NB If you would like more information about IR35, please contact your Old Mill adviser or click here…
If your worker doesn’t meet the above indicators, they’re an employee, even if they don’t have a written employment contract.
Employees have certain rights, such as parental leave, sick pay and redundancy pay which don’t apply to the self-employed.
The employer also has reporting requirements – they must submit a ‘Real Time Information’ report to HMRC each month through payroll software detailing their employees pay and deductions. They must also provide their employees with a P60 for each tax year.
Each month the employer must make deductions from the employee’s salary and pay them over to HMRC. These deductions are income tax, based on the employee’s tax code, and employee National Insurance, which is payable at 12% on earnings between £792 and £4,167pcm and 2% on earnings over this.
The employer must also pay employer National Insurance contributions at 13.8% on salaries paid over £732pcm – which makes the cost of employing someone more expensive for the business than using a subcontractor.
If you’ve decided that your new worker is not an employee, you then need to decide whether or not the Construction Industry Scheme (CIS) applies.
The CIS scheme applies if you are a construction contractor i.e. a business which carries out construction and you are employing a self-employed subcontractor to carry out ‘construction operations’.
Construction operations include:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures
- construction, alteration, repair, extension or demolition of any works forming, or to form part of the land forming, or to form, part of the land
- installation (i.e. not repair) in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation or fire protection
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alterations, repair, extension or restoration
- painting or decorating the internal or external surfaces of any building or structure
If your worker falls under the CIS scheme, there are reporting and deduction requirements – namely, the need to submit monthly CIS returns through HMRC’s online gateway service or through accounting software.
The first step to submitting CIS returns is to register as a CIS contractor. Once you’ve done this, you have to submit CIS returns every month even if you’ve had no subcontractors that month.
When you bring on a new subcontractor, the first step is to verify them online using their Unique Taxpayer Reference. HMRC will then tell you whether to deduct CIS tax at 20%, 30% or nil.
When the subcontractor raises an invoice, you must then deduct CIS tax at the appropriate rate on the total but excluding VAT, materials, and third-party plant hire.
This CIS tax will then be paid monthly to HMRC, and the contractor should provide the subcontractor with a CIS invoice, showing the tax that has been deducted at source.
If your worker doesn’t fall under the CIS scheme, they can be treated as a subcontractor, and invoices settled as they fall due without any additional reporting requirements or deductions.
Reporting requirements can be a complex area as each situation is unique and there are some specific scenarios that may not be covered here, so if you have any queries please do contact your Old Mill adviser or click here…