What is a sub-contractor in the UK?
A UK sub-contractor can either be self-employed (invoicing in his own name), or work through an intermediary – usually his own one-man band UK Limited Company. By this I mean he may be the sole director or shareholder, or his wife/husband/partner may also be involved. The main reason why an individual would invoice though his own company would be to withdraw profits by way of dividends rather than through a UK payroll, and thereby avoid Employers National Insurance.
Basically – a way of avoiding a permanent employment relationship and Employers National Insurance (social security).
But some of these companies, supposedly independent and trading at “arms-length”, were contracted on terms similar to employment. Like being entitled to vacation, all duties to be performed by one named individual (with no right of substitution), on the customer’s premises using the customers equipment working alongside existing employees, no liability for professional negligence… etc
To counteract this, the UK Inland Revenue (now called HM Revenue &Customs) issued a tax law against this practice (called IR35).
IR35 required these sort of one-man band companies, involved in disguised employment (as outlined above), to put through amount totalling 95% of their turnover through as UK payroll or pension contributions.
So, contracts were changed to ensure that they would seem to be truly independent, and one aspect here – to help justify independence – is that the sub-contractor can be free to work elsewhere – perhaps selling complimentary products (rather than being solely tied to one product/client).
The key is the contract between the company and the individual (individual’s company).
This should be checked to see how it is worded – it should not look like a job offer!
There are other issues – like UK Employers Liability insurance, which is mandatory in the UK (similar to workers compensation).
In addition, the fact that the sub-contractor has to invoice for their services (rather than be paid a salary), and that once the sub-contractor’s invoices reach a certain level (currently £70,000 per year including reimbursed expenses), and then they have to register for UK Value Added Tax (VAT).
We invite you to read our introduction to IR35 for a more comprehensive explanation.
‘Employing’ subcontractors is often a key discussion point we deal with when helping an overseas company start up in the UK. For further information on how we help companies invest in the UK, please contact us for support and advice.