A Guide To Hiring IT Contractors Compliantly

With evolving changes to regulations involving workers and tax, the process of hiring IT contractors compliantly can take some time to fully understand.

As a recruiter who has specialised in IT contract recruitment for over 28 years and who owns a recruitment agency offering both contract and permanent talent acquisition solutions, I have come to know the inside and out of working with IT contractors compliantly. Below I set out the key points you should know and action before you hire an IT contractor.

Types of contractors

Before discussing the intricacies of hiring IT contractors compliantly, it’s helpful to simply define the two main types of contractors as this can affect the exact responsibilities of your business.

PSC contractors – are workers who become directors of their own limited companies, organise their tax and take responsibility for their employment status.

Agency contractors – are employees of an agency via PAYE, or work through a third-party payroll company like an umbrella agency.

Hiring IT contractors compliantly

Right to work

The Immigration, Asylum and Nationality Act 2006 is an essential piece of legislation that is relevant for engagements with IT contractors. As with permanent employees, employers and businesses are required to ensure that anyone who works for them is not working illegally.

Whilst many good recruitment agencies will be undertaking Right To Work checks themselves as part of their standard procedure, businesses are responsible for checking that this information is correct.

Remember, if the Home Office launches an investigation, they will be looking into not only if these checks have taken place but whether you are holding up to date information as well.

Off-payroll working (IR35)

Since 2021 in the private sector and 2018 in the public sector, the responsibility to make a worker’s tax determination and provide the IT contractor with an SDS (Status Determination Statement) has been on the end client – the business receiving the IT contractor’s services. This only differs if the end client is classed as a small business in the Companies Act. In such cases, in line with governmental legislation, the contractor can then make the determination for the role.

Ensuring that you are hiring an IT contractor compliantly by making an accurate determination is important, as recording the work as Outside IR35 when it should be taxed via PAYE, can lead to hirers paying the workers tax, penalties and interest if investigated by HMRC.

In my experience, if you are looking for help on how to make an SDS, use the HMRC’s CEST tool. In the case of an investigation, HMRC will look to see whether you have taken due care in coming to a decision. If you have filled out all the information accurately in the CEST tool and applied it, HMRC will honour that determination. Doing this is a good way to have peace of mind in the process.

When it comes to best practice for working with IT contractors compliantly, I recommend auditing your SDS every 3 to 6 months, and always when you change the parameters of the role or extend it. Record everything you do, so that you can prove to HMRC that you are doing your due diligence. In their investigations, they want to see that you have a proper process in place and do spot checks to ensure that everything is accurate.

Fair contracts

When setting up a contract, you must ensure that it is robust as well as fair. A contract should protect both you and the IT contractor. When hiring an IT contractor compliantly, always seek legal advice with drawing up the contract. Don’t cut corners, as having a good contract in place will help with any issues that may arise.

The typical clauses built into contracts include:

• Notice periods
• Start and end dates
• Restrictive covenants regarding clients and customers
• Data protection
• Rates, overtime and expenses
• Clear employer/ employee relationship guidelines and expectations in the case of an agency contractor

Contractor bank accounts

If you are engaging a PSC IT contractor who pays their own tax, best practice is to check that the bank account they provide for payment matches up to their Limited Company and not a personal account or is in a different name.

If there appears to be a mismatch in details, this could be a sign that the IT contractor is potentially attempting tax evasion. Follow correct compliance guidelines and don’t turn a blind eye. Ask for details and evidence that you are paying their nominated business account.

Checking recruitment agencies

Another tip is to credit check the recruitment agency you are working with. 600 recruitment agencies have been dissolved in the past 18 months and a sizeable portion are running into financial difficulties. So, when choosing which recruitment agency to engage with, always make sure that they are economically sound.

Worst case scenario involves the recruitment agency going into administration without paying your IT agency contractor. Whilst most recruitment agencies will work to pay all IT contractors first that they’ve received payment for, this is not guaranteed. This could mean that you may end up having to pay the IT contractor twice.

The best thing to do if you do have any concerns about a recruitment agency’s financial situation is to set up a meeting with them to discuss it, so that you can make your own risk assessment.

Confirming insurance

A major part of hiring an IT contractor compliantly is ensuring that the contractor is properly insured for the work you are engaging them to undertake.

Firstly, you need to check whose insurance they are working under – that could be you (the business), the recruitment agency or through their company.

Typically, if they:

• Work through an umbrella agency – usually the agency will provide the insurance
• Are paid through PAYE – you will need to let your insurance company know that you will need to cover them
• Are a PSC IT contractor – they should be providing their own insurance

Next, you need to check the level of indemnity the IT contractor has and make sure the level of cover is correct, and the type of insurance is suitable for the work they are carrying out.

Additionally, make sure you see the insurance certificates and take a copy, whether from the agency or the IT contractor themselves, and put a reminder in your diary of when it runs out. If the IT contractor provides their own insurance, consider contacting them a month before it runs out to remind them to extend their cover. Great IT contractors will be on top of this, but you should consider reminding them anyway and not assuming it will happen. Thorough processes are key to hiring IT contractors compliantly.

Agency worker regulations

The Agency Worker Regulation (2010) legislation enshrines the right of IT contractors working through an umbrella or recruitment agency to receive the same as their permanent counterparts. After a qualifying period of 12 weeks, employers need to provide equal treatment regarding pay, rest breaks, sick leave and holiday pay. It is a recruitment agency’s responsibility to check and ensure that you are adhering to these rules, so make sure to provide evidence when they ask for it.

Overall, there are a number of pieces of legislation and best practice to be aware of in order to make sure that you are hiring IT contractors compliantly. If you are not adhering to legislation and guidance, consequences can range from increased risk to potential big fines and problems further down the line.

VIQU IT is an award-winning contract recruitment agency with decades of experience in engaging IT contractors. For assistance in hiring an IT contractor compliantly, click here to get in touch with our team.