by Andrew Wilson LLM, MBA, PG Dip, BSc.(Hons)
There is no doubt that sub-contracting has a significant part to play in the economy of certain industries, like construction, transportation and consultancy. This is due to the nature of the work often being transient, short term and for a specific purpose. Sub-contracting in times of economic hardship, just like the path ahead, becomes a very popular way of resourcing and completing work. There is nothing wrong with this, so long as the intentions remain transient, short term and for a specific purpose. Businesses still have to consider the health, safety and welfare of subcontractors, but most employment laws have no purpose where there is a legitimate intention to sub-contract.
I would urge you to reconsider how you engage labour only sub-contractors as new tax laws will bolster existing employment laws.
The status of working is viewed in two ways under IR35 and tax law. Someone engaged in work will either be an employee or self-employed. However, in the Employment Law world that same person could be an employee, self employed or…a worker! What does this mean when the intentions to sub-contract become less legitimate and the operative starts to perform and behave a little like an employee?
This is where employment and tax laws come together through a series of tests, some of which are:
- Substitution the operative has a contractual right of sending someone else to do the work.
- Commercial Risk the operative works on, say, a fixed price or quote, where they dictate how the work is best done, for commercial gain.
- Mutuality an acceptance that there is no obligation to give or accept work between the parties.
- Own equipment the operative will have and use their own tools, vehicles and equipment.
- Reasons for the assignment the engagement should be for a fixed time and purpose.
Where one or more of these tests are not met, then the business arranging the works would be liable for unpaid taxes and employment related costs, such as holiday pay. The business is responsible for determining the status and deducting the right amount of tax, while a worker has a number of other employment related rights covered under discrimination laws.
This is a very complex matter, and when the IR35 law changes take place in April 2021, the responsibility for setting IR35 status and paying relevant tax will be passed from contractors to the private sector businesses engaging them – like in the public sector. This also means that the ‘engaging’ businesses will be held liable should HMRC decide status has been incorrectly assessed.
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