The issue of whether a subcontractor is an employee or not has been a little controversial over the years. For contractors, it can be difficult ensuring that the third parties they hire for certain work meet the current definition under HMRC rules.
The main difference between an employee and a subcontractor in the UK is that the former is essentially an individual who works for an employer under a contract of employment and receives a weekly or monthly wage through PAYE.
A subcontractor is an individual or business that is engaged by a contractor to carry out work on a specific project and is considered self-employed. In the construction industry, for example, contractors will often hire third party sole traders and local businesses to carry out certain specialist work.
It is important to note, however, that the terms employee and subcontractor are not always clear-cut. In the building sector, there is often dispute about the employment status of individuals.
There are a number of factors that can affect a worker’s employment status, such as the degree of control that the employer exercises over their work, the way in which they are paid, and their right to work for other clients.
If there is any doubt about an individual’s employment status, it is advisable to seek legal advice.
What’s the difference between an employee and a subcontractor?
There can be considerable overlap between the nature of an employee or a subcontractor. The only reason why this is a problem, particularly in certain industries such as construction, is that it affects the tax status of the individual.
What is an employee?
An employee is someone who works for a business, organisation or individual. They generally have a work schedule, such as Monday to Friday and 9-5, and have a contract with the employer to deliver certain services.
Employees receive pay and benefits (including sick pay and holiday pay) depending on the terms of their contract and generally use the employer’s equipment and facilities. They pay income tax and national insurance through PAYE either weekly or monthly.
They can work either on a part time basis or full-time but generally have a long term relationship with the employer and have certain basic employee rights under the law.
Examples of an employee include a shop worker, cleaner, office clerk, marketing executive or company CEO.
What is a subcontractor?
A subcontractor is someone who is hired by a contractor to complete a specific job. They are self-employed, either a sole trader or a limited company.
For example, builders with certain skills such as plasterers, carpenters, and bricklayers often work on a contractual basis. Other sectors where subcontractors abound include finance, architecture, and consulting.
A subcontractor invoices the contractor for a project and can work for more than one business at the same time. They can decide on their work schedule, depending on the project, and use their own equipment or resources. They are responsible for paying their own taxes and national insurance.
They do not tend to have employee benefits such as holiday pay or the protection of employment law and, if a limited company, they may hire employees to complete work.
Does the length of the contract make a difference?
The length of the contract should not make a difference to whether someone is classed as a subcontractor or not.
If someone is working full-time providing services for a business or individual and they are not providing them for other companies, then it might be reasonable to assume that they are an employee, however.
Is it better to be a subcontractor or employee?
The benefit of being a subcontractor is that you can pick and choose who you work for and where you work. You can specialise in a certain area and have the potential for earning more money because you can offer your services to more than one business.
On the downside, you do not have access to employment rights and, because you are self-employed, you need to manage and pay your own tax and national insurance. There are, however, some tax advantages to being a subcontractor. For example, you can use allowable deductions to reduce your tax burden.
For businesses, the benefit for a business of hiring subcontractors is that they don’t have to deal with issues such as PAYE and employment law and can hire people as and when they are needed.
How is the employment status of a worker determined?
In most cases, the employment status of a worker is determined by the power dynamic in the relationship. If someone is told by the employer that they have to be in the office at a specific time and day or do specific work, then it is likely they are best classed as an employee.
There are grey areas, in particular within the construction industries where artisans such as bricklayers and carpenters will often work for a specific contractor full-time and are not classed as employees.
Why is it essential to get worker classification right?
The working relationship between the two parties is important from a tax perspective. HMRC has been trying to reduce the number of people who classify themselves as subcontractors mainly because it brings in more revenue.
This is why IR35 was introduced by HMRC. It was created in 2000 to put the onus on contractors to classify the people who work for them properly – in this case, employed for tax purposes or self-employed for tax purposes.
You can check your employment status here.
What is ‘disguised’ employment status?
A disguised employee is an individual who fulfills the same role as a permanent employee and should legally be considered as one but is hired as a subcontractor instead.
The subcontractor gets a more generous tax rate, while the end client doesn’t have to pay for employers’ NICs, insurance, or any other administrative costs of hiring an employee.
In short, HMRC loses out. If someone is discovered to be a disguised employee, then it can mean both the contractor and subcontractor are sanctioned and may have to pay any shortfall in tax and NI contributions.
Managing payroll as a limited company
Tax and accounting can be challenging for a limited company. Smaller businesses tend not to be able to afford professional accounting in-house. That’s where the specialist accounting team at VW Taxation can help.
Contact us today if you need help managing payroll as a limited company.
The difference between an employee or a subcontractor can often be a little difficult to discern in sectors such as construction. When you hire subcontractors getting the designation right, however, can prevent sanction from HMRC which could see you fined or repaying lost taxes and NI contributions.