If you need to engage the services of another individual to complete a specific task, it is important to get it right.
What is a sub-contractor?
While working with your client, you may identify an opportunity to engage the services of a sub-contractor – a person whose services you will bill to your client, possibly at a rate higher than what you are paying the sub-contractor (and so make a small profit along the way). You have two options here;
(1) Sub-contractor – Simple to deal with – the subcontractor bills you, and this becomes an expense for your company;
(2) Salaried employee – So not really a sub-contractor at all! This person would be on your books as an employee, and we would run payroll for this person, calculating PAYE/NI/pension deductions along the way;
A sub-contractor is any person or firm that you engage to perform a specific task as part of an overall project.
There are various ways your sub-contractor could operate. They could use a PAYE umbrella, have their own ltd company, or be self-employed. Regardless, you will receive an invoice for their services, and like any business expense, you pay your sub-contractor directly from your business bank account.
VAT Trap
Remember that if you are VAT registered on the flat rate scheme, and you engage the services of a VAT registered sub-contractor, none of the VAT you are billed can be reclaimed, so the VAT also becomes an expense for you. In cases like this, it MIGHT be better for your company to switch to the standard rate VAT scheme**. The decision will be based on how much you expect your sub-contractor will bill you, the duration of their services, and your own anticipated company turnover over the next few years. Please ask your account manager to discuss this further if you think it applies.
Example
Jim has his own company, and is VAT registered on the flat rate scheme at 16.5%. His sub-contractor has just billed him £1,000 + VAT = £1,200. Jim billed his own client £1,150 + VAT = £1,380 for the services that this sub-contractor supplied. Jim’s flat rate VAT adjusted income is £1,152. His expenses are £1,200 (no VAT can be claimed back on the VAT flat rate scheme). So overall, Jim makes a LOSS of £48 from using a sub-contractor. Jim would need to bill his client approximately £1,200 + VAT to recoup his costs.
If Jim’s sub-contractor was NOT VAT registered, then Jim would make a profit of £152.
So if you are VAT registered on the flat rate scheme, the VAT status of your sub-contractor is VERY important to your profitability.
** Remember, if you deregister from the flat rate scheme for VAT, you will not be able to re-register again until one year has passed.
Salaried Employee
The alternative to paying a sub-contractor is to engage the person as an employee of your business. This can be an attractive option, especially if the flat rate VAT issue described above exists. However, engaging an employee also brings its fair share of administrative duties and obligations;
(1) Operate payroll for your employee;
(2) Register with a pension scheme, and pay the required pension contributions on behalf of your employee;
(3) Observe statutory employee benefits such as holiday pay, sick pay, maternity pay etc;
(4) Keep adequate HR files for all employees;
(5) Provide a safe working environment for your employee;
(6) Observe UK employment law in relation to how you treat your employee;
Example
Jim has his own company, and is VAT registered on the flat rate scheme at 16.5%. He has engaged an employee and will pay them £1,000 per week in gross salary. Jim billed his own client £1,150 + VAT = £1,380 for the services that this sub-contractor supplied. Jim’s flat rate VAT adjusted income is £1,152. His expenses are £1,000 + £116 (employers NI) = £1,116 So overall, Jim makes a PROFIT of £36 from using an employee.
Reporting requirements for employment intermediaries
Working trends have changed in recent years and now many people use an employment intermediary to help them secure work. As a result of this, new legislation came into force on the 6th of April 2015 for employment intermediaries (eg your recruitment firm/agency).
Background
The changes have been brought by the government’s aim to tackle the issue of contractors working under false self-employment conditions. Although we suspect it was originally intended for those in self-employment (ie not ltd company or umbrella workers) this piece of legislation spreads its net wide.
Who it affects
All companies that supply workers (who are not their own employees) to an end client will be required to file a quarterly report to the HMRC. In most cases this will be your agency’s responsibility.
How it will affect you
Unless your agency already holds this information, they will ask you for it
How it COULD affect you
There is the possibility that your company meets the definition of an agency for the purposes of this legislation.
Both of the following conditions will need to be satisfied, if this is the case:
- Your company has a contract to supply services to an end client (note, an agency/recruiter is not an end client), AND
- There is more than one person working on that contract – either you use sub-contractors to do the work, OR there is more than one Director/Shareholder physically doing the work for the end client;
This makes your ltd company an intermediary, and so you must prepare quarterly filings for the HMRC.
IMPORTANT: You don’t have to include details of workers who:
- don’t have to pay tax in the UK
- are your own employees
- provide their services entirely from their own home or premises not managed by the client – unless they have to because of the services and work they provide to the client
- are overseas workers and not UK tax residents
If this is the case for you, be aware that you won’t be asked to file, you just have to do it (generally because the HMRC have no idea who should and shouldn’t file). And to help motivate you there will be penalties for late filing and failure to file, and also for incorrect filing. Reports have to be submitted for each tax quarter no later than the 5th of the following month.
We will get in touch with you each quarter if we think you may be required to submit a quarterly report. We will send you the report to complete, and we will submit this to the HMRC on your behalf once you have sent the completed report back to us.
It is however important that you understand that you are responsible for submitting this report, as well as ensuring that the information is complete and correct.
Information required for reporting
The information the agency will be required to file about any sub-contractor is:
- ‘Workers’ full name
- Full address and postcode
- National Insurance Number. If for any reason this is not available, you must provide date of birth and gender.
- Engagement details (Self-employed, Partnership, Limited liability partnership, Limited company, Non-UK engagement, Another party operated PAYE on the worker’s payments)
- Workers UTR (If Self-employed, Partnership, Limited liability partnership)
- Companies House registration number (If Limited company)
- Assignment details (start/end dates)
- Pay rate (VAT?)
- Name and address of party paid by intermediary for worker’s services
Deadlines and penalties
You must send HMRC your report, or reports, by each reporting period’s deadline or you may receive a penalty. The deadline is one calendar month from the end of the reporting period.
If your report is late you will automatically be charged a penalty.
The amount of the penalty is based on the number of offences in a 12 month period. The amounts are:
- £250 – first offence
- £500 – second offence
- £1,000 – third and later offences
If you submit a late report, but at least 12 months have passed since the last time you were late, it will be treated as a first offence.
If you submit a report that is incorrect, penalties may apply. An incomplete report, for example a report where any information is missing, will count as an incorrect report. Penalties for incorrect reports will be determined on a case-by-case basis.
If HMRC finds that you should have submitted a report and you have failed to do so, you may also receive a penalty.
Record keeping
You must keep information, records and documents that prove what you sent to HMRC was correct.
This information should include any documents that show:
- who was paid
- how you worked out the amount you reported
- why you didn’t operate PAYE on the worker’s payments
- the worker’s payments were already included in an RTI submission by any other organisation
- why you left out required information or sent your report late
HMRC may ask you for this information.
You should work with the workers, other intermediaries involved in supplying the workers, and the clients to get suitable evidence. HMRC must be satisfied that you didn’t have to operate PAYE on their payments.
You must keep documents in the form that suits you best for a minimum of 3 years as evidence of the reasons why you did not operate PAYE on workers’ payments.