Contractor agreements are used when businesses engage the services of an independent contractor or consultant. This can be either directly – if they are self employed or via their limited company.
When should I use one?
Contractor agreements are particularly helpful if you are engaging someone for a particular job or a fixed term. They are used for tradesmen, but equally, they are regularly used in the digital economy for software developers, web designers and SEO consultants.
Why should I use a contractor agreement?
As a general principle it is useful to have the commercial terms of the agreement written down. This includes things like the contractor’s specific responsibilities, when and how they will discharge their responsibilities and how much they will be paid.
But it is also a useful way of safeguarding any intellectual property that they may be exposed to – particularly for consultants who might have access to valuable customer lists, trade secrets or proprietary website data relating to SEO and web traffic. And not least, because when a consultant finishes his or her engagement, he or she will necessarily be talking to similar businesses in similar industries, which puts at risks some of your most valuable IP.
What’s the difference between a contractor and an employee?
This isn’t quite as straightforward as it might seem, as the status is determined according to certain criteria for taxation by HMRC and by different criteria under employment law. So this is certainly an area where it is helpful to have solicitors and accountants under one roof, as Accounts and Legal does.
They key difference between the two is that self employed person working as a contractor, takes responsibility for their own commercial success or failure. They aren’t paid through a company’s payroll, and they don’t have the same rights as an employee, like paid holiday or sick pay.
From HMRC’s perspective, a contractor is exempt from PAYE taxation. In addition to taking the commercial risk described above, a contractor is also likely to decide what work they do, when and how they do it and whether they can send someone else to do it. If their workmanship is unsatisfactory, they will also be responsible for rectifying any problems at their own cost.
A particular point of confusion arises in the case of self-employed “workers”. For tax purposes, HMRC considers them self-employed, and exempt from PAYE deductions. However, they have certain limited employment rights including receiving the national minimum wage and minimum level of paid holiday. And they usually aren’t entitled to minimum notice periods or protection against unfair dismissal or redundancy pay.
What about IR35?
HMRC has long been concerned about employees avoid paying their fair share of tax by becoming self employed. Until recently, the government placed the onus for determining an contractor’s taxation status (IR35) on the contractor themselves. However, this has proved very difficult to monitor the estimated 4.8million self employed people in the UK.
As a result, the government has announced plans to change the responsibility for testing the status to employers. The government has prepared an IR35 tool which runs through a series of questions to determine this status, and on this basis the employee determines that the contractor is actually an employee, the employer must notify the individual concerned and then make PAY deductions for tax and national insurance.
Need some help?
Accounts and Legal is lucky to have accountants working alongside solicitors, and this is certainly an area where our multi-disciplinary approach is helpful. Please don't hesistate to drop us a line if you have any questions.