WHATS A SUB-CONTRACTOR ARRANGEMENT?
Ever wondered what a typical subcontractor arrangement looks like?
1. Commercial Aspects
Here, you outline how you and your subcontractors interact on a daily basis. It’s essential to explain the lawful business reasons behind these arrangements.
It covers practical arrangements like:
- Use of company vehicles
- Wearing your company’s uniform
- Access to tools or materials
2. Operational Autonomy
Can you demonstrate that your subcontractors are operating as independent businesses, rather than as employees?
Two key indicators are the potential for profit or loss. The Contractor may require the Subcontractor to correct any defective work at their own cost or in their own time. Demonstrating financial risk
Another strong indicator of autonomy is that subcontractors have control over their working hours. They can generally decide when to carry out the work, whether it meets agreed-upon deadlines or quality standards. This flexibility is another clear sign that they are running their own business rather than working under direct supervision like an employee.
3. The Legal ‘Tests’
These are the legal criteria used to assess employment status. Your agreement should show that you meet all three of the main tests:
- Personal Service – Does the subcontractor have the right to send someone else to do the work? (also known as ‘Right of Substitution)
- Mutuality of Obligation – Is there a constant obligation to offer and accept work?
- Control – How much say do you have over how, when, and where the work is done?
A Handy Tool: HMRC’s CEST Test
A valuable tool for assessing employment status is HMRC’s Check Employment Status for Tax (CEST) tool. It’s designed to help both contractors and subcontractors determine whether a worker should be classed as employed or self-employed for tax purposes.
You can access the tool on HMRC’s website, and it provides a decision based on how work is set up, including questions on substitution, control, and financial risk. While it’s not legally binding, using CEST can support your due diligence and demonstrate that you’ve taken steps to assess status correctly.
Finalising Your Subcontractor Agreement
In addition to the three core areas, your agreement should include:
- Effective date and payment terms
- CIS deduction details
- A clear statement that the subcontractor is:
- Self-employed
- Responsible for their own Tax and National Insurance
- Not entitled to benefits like holiday pay or sick pay
Ensure that the contract clearly states the subcontractor is providing services on a self-employed basis and is in business for themselves, ideally, at the beginning of the contract.
Finally, ensure both parties sign the agreement. This confirms mutual understanding and agreement: the subcontractor agrees to provide the service, and the contractor agrees to pay for it.
