The question of how long a subcontractor can work for the same company in the United Kingdom has a surprisingly simple answer. There is no maximum time limit. If a subcontractor and a company are both happy to continue working with each other, then that is perfectly fine.
What is a Subcontractor in UK?
A subcontractor is considered an independent business in the UK. They agree to provide agreed services for a set fee (and possibly duration) under a contract. Note that when a subcontractor is hired, the company becomes their client.
In simplest terms, they are not a part of the business, the business has no legal line management over them, the business doesn’t manage or supervise them and you don’t even tell them how they are going to do their work. The client simply has outsourced their own company’s work to the Subcontractor and they are effectively delivering the service to the company or to the company’s customer ‘as if they were the company.
However, a subcontractor may want to renegotiate the contract after a while as they build up more experience. After a year of working with a company, for instance, you will have much more value for them because you are familiar with their business. With that in mind, you may want to use a shorter contract and renew it, rather than immediately signing up for several years.
Owing to that, the time on its own has no implication for tax or any other legislation. Problems occur, however, when it is not clear what the working relationship is and whether the person providing work is a genuine contractor.
Note that if the person providing the service is an employee in all but name, this can cause complications and potentially serious consequences. To prevent this type of sham contracting, HMRC devised a set of laws to tackle this and separate fake contractors from real ones. These laws are known as IR35.
Also known as the ‘intermediaries legislation’, IR35 simply refers to a set of tax laws that came into effect in the early 2000s and are part of the Finance Act. It was established to stop people claiming to be legitimate contractors while working in the same way as employees. Since employees more or less pay a higher amount of tax and insurance than contractors, people were eager to fool HMRC before IR35 was introduced. They would not pay the right income tax and national insurance in accordance with how they worked.
In the same vein, companies using them was not providing them with the statutory benefits that employees get and were not paying the correct National Insurance contributions! HMRC refers to these people as ‘deemed employees’ or ‘disguised employees’. It is very imperative to note that from 2020, the responsibility of IR35 will be passed to the company hiring a Subcontractor, including recruitment agencies – as is already the case in the public sector.
For you, as the “engager”, you don’t have to worry about the employment status of the limited company you are subcontracting work to – they are simply ‘subcontractors’ in your accounts. They may have IR35 considerations if the work involved would more or less be considered that of an employee, but it is up to them to know their employment status and apply the IR35 legislation.
This is why many larger companies will only subcontract work out to limited companies – it makes their administration safer and easier. The rules surrounding IR35 will be changing in April 2022, so do not underestimate the importance of understanding IR35. If you subcontract work to an individual, you’ll need to pay much closer attention to their employment status.
Have it in mind that if you incorrectly determine they are a sole-trading independent contractor and HMRC (or the courts) deem that their work was actually that of an employee, then it is your responsibility as the ‘engager’ to settle the unpaid PAYE and National Insurance. In addition, there may be late payment fines and other penalties for the incorrect submission of your company’s PAYE returns.
How to Know When a Subcontractor Becomes an Employee
Indeed, it is not always easy to know whether someone is classed as an employee or a subcontractor. Many managers would want it one way or the other but unfortunately, it is not up to management. Others such as HMRC or an Employment Tribunal will make the decision. In the UK, there are many legal tests that can be applied to help determine if someone is an employee.
The Control Test
Note that if the employer controls the work that is done and someone from the employer’s organization supervises the person doing the work they are likely to be an employee. Conversely, a contractor is likely to be working with the organization because of their expertise. They are likely to agree in advance on the timescales, the deliverables, and the price.
However, for the person to be classed as a contractor they are expected to choose who carries out the work; they don’t personally have to do it. For the worker to be a contractor the organization letting the contract, should not control the work or who does it. It just takes an interest in compliance with the specification of the deliverables.
The Integration Test
This test considers the extent to which the individual is considered important to the organization’s operations. If an individual is invited to company social events; is receiving all company internal communications and is fundamental to the processes of the business then they are likely to be considered an employee. In the United Kingdom, to be considered a contractor, they should not be integrated into the organization, but instead, they should be undertaking project-based work adjunct to the business processes.
The Economic Test
It is common for employers to provide facilities for employees, who do work and are paid a wage. This test asks if there is any reason why a worker should not be classified as an employee. Note that consideration is given here to whether the individual owns their own ‘tools of the trade’ and whether they are in charge of their own tax and national insurance liability.
If a worker receives a regular payment or a wage, sick pay, and holiday pay, then it is likely they are an employee. Conversely, if they provide their own tools, this strengthens the argument that they are an independent contractor.
The Mutual Obligation Test
Contractors more or less work through an ‘arms-length agreement’ to do work for the contracting organization from time to time. Note that as the worker moves closer to the contracting organization (ultimately becoming an employee), the expectation of sustained and continuous work increases.
Therefore, if there is an obligation, by way of a written contract or a tacit implication, on the part of the contracting organization to provide work, and an obligation on the part of the individual to do that work, then it could be construed that the worker is an employee. Effectively the test asks if the worker is ‘dependent’ on the contracting organization.
The employee or subcontractor debate is not going away any time soon. In fact, the more news coverage it receives, the more challenges are expect from HMRC. Whether an individual is an employee or a self-employed independent subcontractor not only determines how tax is applied but also relates to the various rights that employees have that contractors don’t. This is a legal definition that is based on past and emerging case law. It is not a definition set by HMRC – they only provide guidance.