Can I Supply a Contractor As a Sole Trader?

First of all, you need to determine if the agency rules apply under sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) to determine your tax liability in this sort of supply.

Sections 44-47 ITEPA apply to the supply of a contractor (even if they call themselves a sole trader) via you (an intermediary) to work in an assignment with the right to supervision, direction and control (SDC) of a third party (the client) in return for payment. If this is met the contractor would be treated as an employee for tax purposes and you as the intermediary would be classed as the employer responsible for deducting tax and national insurance contributions prior to paying the contractor.

If the assignment is not subject to the right of SDC then the tax liability remains with the contractor to deduct the appropriate tax and national insurance. If the determination that the assignment is not subject to SDC is incorrect and the contractor should have been taxed as an employee then it is possible that liability for shortfalls in tax and national insurance could shift to your business and/or the client.

To avoid liability for this you need to prove that no SDC applied by making enquiries of the client. You should include indemnity and obligation provisions in your contractor’s terms to ensure that they apply the correct tax and national insurance if paid gross by you and to recompense you if you suffer a loss as a result of their non-compliance.

The REC template contracts do not cover this arrangement because of the increased risk. You could ask if the sole trader is willing to work through a limited company because the limited company would offer some protection as a separate legal entity between you and the contractor. The REC have “appropriate contracts” to deal with the supply of limited company contractors.