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Contractor Payment Methods and Risks
With so many services offering various ways to pay your contractors, we thought it might be helpful to provide some further information to help you minimise any potential risk for your agency.
In summary, the perceived wisdom is that all payments to individuals for services (whom are not actually employed by the agency) should be paid by one of two methods:
- Umbrella / Employment management company (e.g iBalance)
- Own limited company (where worker is outside IR35 and client/agency has minimised their risk of being caught by the MSC legislation)
Although there is no legal barrier to paying self-employed, the risk factor is high in both the degree of uncertainty and actual costs. If your local PAYE inspector decides one of your 'self-employed' workers is actually your employee, then HMRC would raise PAYE/NIC charges of around 45% of the amount you originally paid (plus interest and penalties). As there is no statutory definition of 'self employed' there is, in reality, no way of predicting who is or isn't.
There are some payment service companies that offer to act as intermediaries and pay agency's 'self-employed' workers. Its hard to see how any such intermediary would not be caught by the new 'Managed Service Company' (MSC) legislation. The legislation allows the Revenue to collect any contractors' unpaid tax from their agency under the MSC Transfer of Debt rules.
Limited companies providing individual's services are also potentially caught by the MSC legislation. Many agencies take the view that they do not want the hassle or cost of managing this MSC risk, and insist all workers invoice through an umbrella company.
Quube provides a 'supplier questionnaire' service to its clients, which helps agencies make an informed decision of the risks and which suppliers are suitable to contract with.
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