Enterprise Nation

As your home business grows, you may contemplate taking on another pair of hands. But you won’t know whether current growth in the business is a trend or short term increase. Outsourcing or entering a sub contractor relationship could be the solution but be sure to consider the legal rules.

An employee by any other name

Is the sub contractor a sole trader or a small limited company? This group is most at risk from being considered by HM Revenue and Customs (HMRC) as employees, whether they are or not.

HMRC asks the following questions in considering if the relationship is employee/employer.

1. Would the sub contractor be an employee if they worked for the client (to whom services are provided) directly and not through your company or partnership?
2. Does the company or partnership you work through meet certain conditions?

What are those main conditions?

• Working set hours
• Supervision and control
• Sickness and absence payments
• Working for 1 or more organisation
• Any job title
• Obligations of parties to offer and accept work
• Provision of equipment (not just tools which employees may provide anyway)
• Ability for worker to provide substitutions and to hire and fire to perform work the worker has taken on
• Termination of the arrangement
• Worker’s financial risk
• Does the worker or his family own more than 5% of company shares or is entitled to 60% or more of profits

For each of the main conditions there are other questions but in essence HMRC test the relationship and have the legal right to order PAYE if applicable. This means that if you have been paying a sum on invoices to the sub contractor that sum is taken as net and the PAYE calculated at the gross amount and charged to you. You can appeal but it is costly and a major distraction to many small businesses.

The answer to this problem is to organise your sub contracting arrangements with suitable terms and conditions like this one which comes with advice. You also need to consider how you use your subcontractors to ensure you obtain maximum protection and so they can help your business to the very best advantage.

• Sue McGaughran, Lime One