As your company grows, your IT requirements change. You may find you need to integrat
e systems to improve efficiencies or develop bespoke software, and you may come to the point where you need to make use of the services of a specialist software developer. Perhaps you don’t have any software development or systems integration engineers within your IT department or, if you have, they are either already working at capacity or don’t have the specific skills you need for this project. Your first thought may be to hire an individual contractor to come and work within your company to fill that gap for you. On the face of it, this appears to be the simplest and most logical solution – you get the skills you need without any of the financial commitments involved in taking on another member of permanent staff. While hiring a contractor can certainly have its benefits, it also has some, potentially serious, downsides.
The chances are your contractor will work from your premises, meaning that you have to supply them with a number of resources, even if they bring their own laptop! While a contractor will be employed for a fixed term that you believe will cover the time needed to deliver your project, this may not allow for delays in project delivery and your costs could spiral. Delays could potentially arise due to a number of factors such as sickness, holidays, or a skills gap in the contractor’s own knowledge meaning it takes them longer to effect a fix or provide a solution. There are also the difficulties that can arise from a desire to directly supervise the contractor’s work but actually being hands-off in terms of not being able to control their work.
Over the last few years, HMRC have been challenging contractor status in a growing number of instances. If the law decides that someone’s employment status is wrong, the company and the individual may have to pay unpaid tax and penalties. While you may believe your contractor to be self-employed, there are factors that could lead, in law, to that contractor being declared an employee. If they are, the implications are not just restricted to tax and National Insurance because there are also employee rights to consider – sick pay, holiday pay, maternity/paternity rights and so on. So what are the factors that are considered?
A truly self-employed contractor can decide what work they do and when, where or how to do it. They can also hire someone else to do the work and can work for more than one client. A self-employed contractor is in business for themselves so they use their own money to buy business assets, cover running costs and provide tools & equipment for their work. So is the person you have sat in your IT department, at your desk, on your chair, using your computers, and who you expect to work Monday-Friday 9-5 an employee or a contractor? What if you walked in on Tuesday and found a different person sat in that chair?
“…under a contract of service a man is employed as part of the business and his work is done as an integral part of the business but under a contract for services his work, although done for the business is not integrated into it, but only an accessory to it.” Denning LJ (Stevenson, Jordan and Harrison Ltd v Macdonald and Evans (1952)
The whole situation has now been made even more complex with the introduction of the IR35 tax rules in April 2017 for public sector contractors. The general view is that these rules could be extended to apply to private sector contractors within the next 2 years, and possibly as early as spring 2018. More on that next month.
Of course, you could hire a contractor through an ‘umbrella’ company and that should take care of any employment status issues. There is another option to consider though, and that is to outsource your project to a company that will allow you access to a small team of software developers and specialists. Apart from removing all concerns about employment status, there are a number of other benefits: working collaboratively with a small team who have knowledge and experience of a broad range of platforms ensures that solutions are developed quickly, delivered on time, and to budget; a small, established company can provide more flexibility and expertise than an individual; sickness and holidays do not present problems and downtown is virtually eliminated.
Software development and systems integration projects need to run as smoothly as possible. Doesn’t it make sense to use not only the best type of resource for the job, but to eliminate the risk of a challenge from HMRC at the same time?
More information on employment status can be found at:
https://www.gov.uk/hmrc-internal-manuals/employment-status-manual
