Despite what you may have been told, using subcontractors long-term is not a grey area. There is no limit on how long you can work with subbies – nothing in UK law and nothing in HMRC’s regulations.
So why on earth does it cause so much confusion?
Probably because there is no clear definition of what “long-term” means. Is it three months, six months, ten years? Or is it when subbies work on multiple projects for you?
What’s the difference between using a subcontractor on a single project that takes two years and using a subcontractor for two years on multiple projects?
Nothing.
Because if the subcontractor is genuinely self-employed, you can work with them for as long as you want on as many projects as you want.
How long can you work with the same subcontractors?
You can work with the same subcontractors for as long as you want – years if needs be. And you do not have to employ them, you can pay them on an hourly rate.
But that doesn’t mean you can simply disguise your employees as subbies to get out of paying them holiday pay. And it doesn’t mean your subbies can decide they are self-employed just because it suits them.
It is your responsibility as the contractor to determine the employment status of your workers. So if they are treated as an employee, act like an employee, and are an employee in every way except the way you pay them, then you probably should put them on your PAYE.
Because if HMRC does decide to open an enquiry and reclassify your subbies as employees, you’ll be responsible for paying the fines.
What about IR35 and the 13-week rule?
You might have heard people saying you can’t work with subcontractors long-term because of IR35 or because of the 13-week rule, but both of these are myths.
IR35 is a piece of legislation introduced to stop subcontractors from hiding behind limited companies in order to pay less tax. It does not apply to sole traders.
And the 13-week rule links back to the Agency Worker Regulations (AWR) which is for agency workers, not subcontractors.
Neither of these are relevant if your subcontractors are genuinely self-employed.
There is no law regarding how long subcontractors can work with the same contractor even if that contractor is their only client.
So what is the problem with using subcontractors long-term?
The length of time subcontractors work for you is not an issue. The issues come when the lines start to get blurred and subbies become employees in all but name.
For example, you start giving your long-term subbies more responsibilities – tasks that would usually fall to an employee. You start to become reliant on them, assuming they’ll continue showing up for as long as you need them. You start covering little expenses for them here and there, loaning them your vans and tools, paying for their petrol, even giving them a small Christmas bonus.
And that’s all well and good while the work is there and HMRC aren’t looking in your direction.
But what happens when the work suddenly dries up, and you have to lay your subcontractors off because you no longer need their services? When a no-win no-fee solicitor tells them they could claim unpaid holiday and unfair dismissal because they were technically an employee?
How about if HMRC starts questioning why your subcontractors drive your vans and use your company fuel cards if they aren’t employees?
That’s where the lines start getting blurred, and what should be black and white becomes grey.
Because if a subcontractor is deemed to be an employee in practice, even if not in name, they may be entitled to the same rights and benefits as regular employees. And you could find yourself having to cough up for unpaid income tax, NIC and pension contributions.
Why is HMRC concerned with employment status?
There are two key reasons HMRC are interested in employment status.
The main reason is financial. Nobody wants to be scammed out of money, and HMRC is no different. They want to ensure everyone is paying the correct amount of tax.
But there’s another reason they don’t like contractors cheating the system – it’s unfair on workers.
Employees are afforded certain rights – holiday and sick pay, redundancy, pension contributions, maternity and paternity pay, etc. These rights don’t protect the self-employed.
So if HMRC weren’t on the lookout for employees disguised as subbies, more companies would take advantage of their workers by forcing them to work as self-employed.
How do you prove your working relationship with subcontractors?
Avoiding the wrath of HMRC all comes down to one simple thing: can you prove there is a legitimate business case for working with your subcontractors the way you do?
The answer has nothing to do with how long you work with them. It has nothing to do with payment terms. And it has nothing to do with what uniform they wear, whose vans they drive or who pays for their equipment.
You have to prove they are genuinely self-employed. You have to demonstrate that they are a business in their own right and that the relationship is one of contractor and subcontractor.
Documenting your relationship in a comprehensive agreement can help you do it.
And that’s not the only good reason for having a contract in place. A contract makes it clear to both parties what the terms of the relationship are and who is responsible for what. For example, your contract might specify that you expect a subcontractor to rectify defective work at their own cost.
What are your options for working with subcontractors long-term?
Hiring subcontractors on a long-term basis offers many benefits – you know they are reliable, you can trust them, and they are familiar with the way you work. It just makes life easier. But if you want to continue working with your subbies long-term without upsetting HMRC, you need to protect yourself (and them) from the risk of an enquiry.
So what are the options for working with subbies long term?
Employ them
If you’ve found competent, capable, reliable subcontractors, then it might make sense to offer them a full-time employment contract.
But while there are certainly benefits to employing good people, there are some downsides. There’s more pressure on you to find enough work for everyone, and you’ll have the added obligations of paying sick pay, holiday pay, pension contributions and so on.
You’ll also be responsible for their ongoing training and any licences they need, as well as dealing with disciplinaries, performance management and all the other HR stuff that comes with having employees.
That said, you shouldn’t rule out employing your best subcontractors. You won’t have to worry about HMRC investigating their employment status. And you’ll have greater control of your workforce – you can dictate when and how they work, and move them from project to project without having to renegotiate terms each time.
Use a payroll company
Payroll companies sit between you and the subcontractor in the contractual chain. They verify your subcontractors, figure out what they should be paid, and send out payslips and CIS tax statements. You don’t have to do any of the admin work. All you have to do is pay the invoices so the payroll company can pay your subbies.
But there are some downsides.
As with anything, this service comes at a cost. In many cases, the cost is passed on to your subcontractor – usually around £15 per week. And although £15 doesn’t sound like much, it’s a bit crap that your subbies have to pay a fee just to get paid what they’re owed.
Of course, you could cover the fees for your subcontractors yourself, but that’s not the only cost you’ll need to bear in mind. You’ll have to pay VAT on top of your weekly wage bill and make the CIS payments upfront. And that can have a huge impact on your cash flow.
Plus, the contracts put in place by payroll companies won’t necessarily protect your business from HMRC enquiries.
Put a written subcontractor agreement in place
The third option is to put a written subcontractor agreement in place. You retain control of your payroll, keep control of your cash flow, and your subbies don’t have to fork out £15 a week so they can get paid.
You could pay for an off-the-shelf subcontractor agreement, but these come with some risks. And cannibalising someone else’s contracts is a bad idea too.
We recommend creating a bespoke subcontractor agreement and it needs to cover three key things:
- The commercial aspects
- Business factors
- The ‘tests’
We call this our three-factor formula, and you can read about how to implement it in our free book. Get your free copy here.
Get a bespoke contractor-to-subcontractor agreement from HardHats
If putting together your own subcontractor contracts sounds like a headache you don’t want to deal with, there is a fourth option for working with subcontractors long term.
Let us create a bespoke, watertight subcontractor contract for you that outlines the true working relationship you have with your subcontractors.
All our contracts are insurance-backed. This means that if HMRC does open an enquiry, we handle it on your behalf. And if a subcontractor is ever reclassified as an employee, we’ll cover all associated costs so you can have complete peace of mind you’re covered.
We’ll even take on the responsibility of getting your subcontractor contracts signed via email or text using our online system.
Find out more about how it works here, or book a call to get started.