Engaging as Employee or Contractor

Before taking an assignment, you must make one crucial decision: should you be engaged as an Employee or a Contractor?

If you make the wrong choice at the beginning of the contract and change your mind later, it could prove costly and be very difficult to change.

Some workers like the flexibility of being a contractor but also want to have the protection of being an employee (i.e. they want to have the best of both worlds). Unfortunately, all workers must fall into one category or the other, employee or contractor, and that means taking the advantages and disadvantages that go with each one.

It should be noted at the outset that we strongly discourage flipping between “employed” and “contractor” status. Not only will this confuse your end client but it will also raise queries from HMRC regarding your tax treatment, which could affect you financially.

Changing from being a contractor to an employee

If you want to change from being a contractor to an employee whilst working on an assignment, this could have serious financial consequences for you.

Either way, if you are changing from contractor to employee (or vice-versa), in order to avoid falling foul of IR35, you will need to have demonstrated that the way you would work as a contractor was different to the way would work as an employee Consequently, it would also be difficult to show that you work differently as a contractor if you are being engaged to undertake the same work as when you were an employee. 

While the recent employment tribunal case of Tilson v Alstom (2010) suggests that, in some circumstances, contractors can change their status to become employees and thereby receive employment protection, such a change should and may only be made after very careful consideration and in limited circumstances. Any benefit gained from being an employee is likely to be significantly reduced by the tax bill from HMRC.

Choosing to be a contractor

If you decide to be a contractor, you are likely to receive higher fees and retain flexibility in how you provide your services.

You will also have some control over your tax and national insurance treatment as well as having to demonstrate that you are not an employee of your client for IR35 purposes.

If you choose to be a contractor, you will forgo employment protection rights (such as unfair dismissal and redundancy) and the right to be paid holiday and sick pay when absent from work. Some suggest that this is balanced out with the higher pay.

Changing from being an employee to a contractor

If you decide to become an independent contractor instead of being an employee, this could also prove very difficult.

Firstly, you must consider why you do not want to continue to be an employee.

If you want to be a contractor for the higher pay (by paying less tax and national insurance) you will need to be able to demonstrate that you are not a disguised employee or being treated by your client the same way it would treat an employee. If you cannot do this, you are likely to be caught by IR35, thus significantly reducing the financial benefit.

If you want to be a contractor for the flexibility, this will be far easier to secure, but in return, you will be giving up your employment protection. It is worth considering whether, by simply talking to your employer, you can get this flexibility from your current employer without the need to resign from being an employee.

Before considering changing from an employee to a contractor, you should ensure that you have a client base and will not be reliant on work from your current employer. If you simply cease to be an employee but then continue working for your current employer as a contractor (leaving on Friday and returning on Monday), it will be easy for HMRC to conclude that, whilst you now have a new label of “contractor”, in reality, you continue to be engaged as an employee in all respects except for pay and benefits.

As ever, if you chose to work as a contractor, it is essential that you take advantage of our FREE IR35 Review service as part of our all-inclusive service to ensure that you are applying the correct tax treatment to your earnings and establish your correct employment (or non-employment!) status.

Choosing to be an employee from the outset

You will receive all of the employment rights that are available to employed workers which will include the right to claim unfair dismissal, redundancy payments, maternity leave, holiday and sick pay.

However, you are likely to receive slightly lower pay for the hours you work compared to an independent contractor and will have less flexibility as to how, when and where you work.

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