Difference Between Employees and Subcontractors

Published on September 02, 2022

Income Tax

contractors Are the individuals working for you considered employees or subcontractors? It's essential to determine the correct employment status as it significantly impacts tax obligations.

In the ever-evolving gig economy, the roles performed by employees and subcontractors can be quite similar, but the tax implications are vastly different. This article sheds light on why it's vital to distinguish between an employee and a subcontractor and outlines the key differences between them. We also provide a link to an employment status test offered by HMRC.

Why Does Employee or Subcontractor Status Matter?

Correctly categorizing the employment status as an employee results in higher tax revenue for HMRC. Employers don't pay National Insurance for subcontractors, but they do for their employees. This motivates HMRC to scrutinize the employment status of subcontractors in hopes of reclassifying them as employees, leading to backdated tax payments if the status was initially incorrect.

To avoid these additional taxes, contractors must ensure that their subcontractors genuinely meet the tax criteria for subcontractors, not employees. Employees also enjoy additional rights, such as minimum wage, pensions, holiday pay, and sick pay, which can become a burden on contractors if employment status is challenged.

Defining an Employee

An individual working for a business is considered an employee if most of the following statements hold true:

  • They have set working hours, e.g., 9 am to 5 pm, five days a week.
  • They must work those hours unless on leave.
  • Payment is on an hourly, weekly, monthly, or annual basis.
  • Overtime can be paid.
  • Payment is received whether they work or not.
  • The employer determines how, when, what, and where the work is done.
  • They must perform the work themselves.
  • Tools, equipment, computers, etc., are provided by the employer.
  • The contract is open-ended (after any probation period).
  • They have a company email address and business cards.
  • They wear a uniform or use company vehicles, etc.

Defining a Subcontractor

An individual working for a business is considered a subcontractor if most of the following statements hold true:

  • They can choose their working hours.
  • They provide quotes for contracts.
  • Payment is received per contract, regardless of the time taken to complete it.
  • They work for various different businesses.
  • They can make a profit or incur a loss on a job-by-job basis.
  • They have control over the work to be done (how, when, what, and where).
  • They can hire other people to do the work or assist them.
  • They provide their tools and equipment or may hire them.
  • The contract has a fixed period.
  • They have an email address and business card for their business only.
  • Any uniform bears their name, not the contractor's.
  • They use their vehicle.

Navigating the Gray Area

HMRC assesses employment status by considering the overall picture, weighing all factors. For instance, a senior employee, like a manager, may have flexible working hours, some control over the work process, and may bring in personal equipment. However, this doesn't make them a subcontractor.

Still Uncertain About Employee or Subcontractor Status?

Most questions regarding employment status depend on the power dynamic. In an employer-employee relationship, the employer holds the power, determining working hours, pay, the work to be done, and how and when it's done. In a contractor-subcontractor relationship, the power is considered equal. The contractor can set requirements within the contract, such as work, timeframes, and pricing, but the subcontractor has the choice to accept or refuse the contract.

Future of the Employee or Subcontractor Debate

The changing economy blurs the lines between employment tax status more and more. Recent cases, like the one involving Pimlico Plumbers Limited, illustrate the complexity of this issue. In that case, the court deemed an individual an employee because he lacked substitution rights; no one else could perform the work except himself.

Uber and Deliveroo have also been embroiled in debates over driver employment status. While Uber successfully argued that its drivers are self-employed, Deliveroo achieved a similar outcome, emphasizing that its drivers are self-employed.

The HMRC Employment Status Test

To help determine the employment status of individuals, HMRC offers a useful tool. The questions are answered anonymously, and the result is not legally binding, nor is it retained by HMRC. However, it provides insight into the type of questions HMRC asks to make these determinations.

You can access the HMRC employment status test here.

Understanding the distinction between employees and subcontractors is vital for compliance with tax laws and regulations.

Sources

The subcontractor vs employee debate

Employees vs. Subcontractors: What's the Difference?

Subcontractors vs. Employees: A Complete Overview

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