You have decided to hire a self-employed contractor to work on a project.
What should you consider?
Employment status
Even if both parties intend that the contractor is self-employed, neither employment tribunals nor His Majesty’s Revenue and Customs (HMRC) may see it that way, as the reality of the relationship will outweigh what you have written in the contract.
Understand the rules
Ensure you understand the IR35 (off-payroll working) rules and use the Check Employment Status for Tax (CEST) tool to help you.
Although the tests are similar, someone may be classed as an employee under employment law but have a different status for tax purposes. Therefore, you should consider both.
Contract for services
If you are satisfied the individual is a self-employed contractor, draft a contract before their assignment starts — an agreement between you (the client) and the contractor for the provision of their professional services.
Key clauses
- The duration of the contract and the project to be undertaken.
- The services the contractor will provide.
- How the contractor will update you on their progress.
- How much financial risk, flexibility and freedom will the contractor have? The more they have, the more likely they are to be self-employed.
- Where will the contractor work and for how long?
- Whose tools and equipment will they use?
- Payment terms – will they be paid a set hourly/daily fee, or a set fee based on results? What are the invoicing arrangements?
- The agreed notice period, and the right to terminate the contract without notice in certain circumstances, such as gross misconduct.
- Whether the contractor may appoint a suitably qualified substitute to perform the services if they are unable/unwilling to perform them personally – it is more likely they are self-employed if they have a genuine, unfettered right of substitution.
- Protection of the business, such as confidential information and data protection clauses, and a restriction on the contractor taking on other work that might lead to a conflict of interest. You should not require exclusivity.
- The contractor’s self-employed status. This will not be a deciding factor, but it does set out the intention of the parties.
- A tax indemnity should the contractor be held to be an employee for tax purposes.
- The insurance position. Will you require the contractor to have insurance or are they covered under your policies?
CEST tool
You do not have to use the tool to make employment status decisions, but it can help you decide:
- The employment status of a worker or an individual you engage or represent.
- Whether the off-payroll working (IR35) rules apply to a contract.
- If HMRC will consider the worker as employed or self-employed for tax and National Insurance contributions purposes, if they have (or expect to have) a work contract.
