Hiring a Contractor
Introduction When your business needs workers with specific skills for a short-term project, you might consider hiring independent contractors, also known as freelance workers or consultants. Contractors who carry out work for you have a different legal status from employees. They are independent workers who provide their services on a business-to-business basis.
This factsheet provides information about how to hire a contractor. It outlines the tax implications of hiring a contractor rather than an employee and explains the IR35 rules used by HM Customs and Revenue (HMRC) to determine a worker's employment status for tax purposes. It also explains the insurance implications and the health and safety requirements that apply when contractors carry out work for a business.
Hiring When hiring a contractor it is essential to have clear objectives about the work that is required. It is also important to gather enough information about potential contractors to ensure that they can carry out the work effectively and reliably.
Many businesses have 'contractor checklists' that set out the checks that should typically be made before hiring contractors. These will vary from business to business, depending on the nature of the work that is being carried out. However, examples of typical checks include the following:
Shortlisting and interviewing potential contractors.
Examining contractors' CVs or portfolios of previous work.
Requesting references from contractors' previous clients.
Obtaining evidence of qualifications, accreditation or membership of a relevant professional body.
Carrying out a credit check.
Obtaining evidence that the contractor has any necessary licences and/or insurance.
Reviewing and agreeing contractors' pricing and payment terms.
Once you have selected a contractor, you will need a written contract for services, which both you and the contractor should sign. Although a verbal contract is valid, a written contract is essential to protect the interests of both parties. It can be worthwhile getting a solicitor to review or draft the terms of a contract for services.
Employment status and IR35 In some cases, a worker you have hired as a contractor may be regarded by HMRC as an employee, which means that you must deduct tax and National Insurance contributions from the worker's fee and pass them to HMRC.
To determine whether a worker is a contractor or an employee for tax purposes, HMRC takes into account a range of factors such as the degree of control the worker has over their work, whether they work for more than one client and whether they use their own money to cover running costs during the project.
Even if a worker provides their services through an intermediary (such as their own personal services company) HMRC may still class them as an employee, under rules known as IR35.
From April 2020, medium and large-sized businesses will be responsible for deciding if the IR35 rules apply to workers who provide services to them through an intermediary. However, if a worker provides services to a small business through an intermediary, the worker's intermediary will remain responsible for deciding their employment status.
Insurance Contractors are not covered under employers' liability insurance. Before hiring a contractor you must have appropriate public liability insurance. This should provide cover if a contractor is injured or causes injury or property damage while working on your behalf.
Contractors should normally have their own public liability insurance and, depending on their area of expertise, professional indemnity cover. However, you should check this and ensure that the cover they have is sufficient.
Health and safety Under health and safety legislation, you are legally required to take appropriate measures to protect the health and safety of contractors carrying out work for your business. You must also protect the health and safety of anyone who may be affected by the activities of the contractor, such as employees, customers, other contractors and members of the public.
Contractors also have a legal responsibility to comply with health and safety legislation. You and the contractor must liaise with each another as necessary to ensure that work is carried out safely.
Contact Ashored for more information on hiring contractors or IR35 legislation.
