Contractors' Questions: Is it taxing to use other contractors on bid sites?

Contractor’s Question: I am a freelance IT consultant who sometimes uses bidding sites for sourcing people to post small textual adverts about my services to classified ad pages. For example, last month I paid someone $5 to place 50 classified ads about my services online.

I understand from a friend that, legally, I am responsible for ensuring the people I am outsourcing the work to must also be self-employed and, he claimed, that I am responsible for their tax and national insurance. He even said that I must check up to see whether they are registered as self-employed, otherwise I could get in trouble with the authorities. Is my friend telling the truth?

To my mind, the money I pay these people is a tax-deductable expense for me, and an income for them. Therefore, surely I'm not responsible for their tax or National Insurance bill? If I am, then it’s going to be a difficult exercise, as many of the people I hire are based overseas in foreign tax jurisdictions. Please help!

Expert’s Answer: Your friend is not wrong to make you aware of the possible pitfall of paying monies to third parties as you describe. But in your case, fortunately, I think it’s a case of a little knowledge in the wrong hands, rather than something that you need to worry about.

The key issue here is whether HM Revenue & Customs would consider the individuals you engage to be ‘employees’ or are they acting in the capacity of ‘self-employed’ individuals (- just because you call them self-employed does not necessarily make them so).

The courts are littered with a number of cases where HMRC claim one way and the taxpayer the other, so we must look to the milestone rulings in these cases to determine the answer.

In brief, for an individual to be considered an employee, they must be: -

a) under the direct control of the ‘employer’ i.e. told when, where and how to perform their duties; and

b) the relationship must be personal (i.e. the contract must require the individual services of a nominated ‘employee’ who cannot substitute another person to perform the duties); and

c) the relationship must be that the ‘employer’ has an obligation to offer work and the ‘employee’ to accept it when offered.

From the situation you outline, it appears that the individuals you outsource your work to are under no obligation to accept the work when offered; can and do perform the work in their own time (when and where they choose to), and that you have little or no control over how they actually perform their duties. The fact that they often are based in other countries only adds to this argument.

In so much as I am satisfied that these freelancers or contractors are not your employees, then you are correct in your assumption that you have no obligations as far as tax on their earnings is concerned. And yes, you do indeed have a valid deduction against your own income for payments you make for their services.

The expert was Barry Roback FCA, director at Privilege Accounts , a tax and accounting specialist for freelancers, contractors and the self-employed.