Contractor Accountants

Employing contractors

Hiring contractors gives UK businesses flexible access to specialist skills without the overhead of permanent employment. However, it comes with legal and tax responsibilities that must be handled correctly. Businesses need to determine IR35 status for each engagement, issue a Status Determination Statement, agree clear contract terms, verify insurance, and set up compliant payment processes. Getting these steps right protects both the business and the contractor from HMRC penalties.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 1

Key takeaways

Medium and large businesses must assess IR35 status for every contractor engagement and issue a Status Determination Statement before work begins.
A clear written contract should define the scope of work, deliverables, payment terms, notice period, and any intellectual property arrangements.
Businesses should verify that contractors hold appropriate insurance, typically professional indemnity and public liability, before the engagement starts.
Payment should be made against invoices from the contractor's limited company or umbrella, never through the business payroll unless the role is inside IR35.
Treating contractors identically to employees in practice, such as requiring fixed hours or attendance at all-staff meetings, increases IR35 risk for the business.

There are a few steps you'll need to consider with hiring contractors. These include:

Sourcing for contractors
Assessing contractor CVs
Interviewing a contractor
Payments
Contract terms
Terminating a contract

Frequently asked questions

What are a business's IR35 responsibilities when hiring contractors?

Medium and large private sector businesses must assess whether each individual contractor engagement falls inside or outside IR35 before work begins and communicate the decision via a Status Determination Statement. They must take reasonable care in making each assessment and have a documented dispute resolution process available if the contractor disagrees with the determination they have received.

Do I need a written contract when hiring a contractor?

While not strictly legally required, a written contract is very strongly recommended for every contractor engagement. It should clearly specify the scope of work, deliverables and milestones, payment schedule, notice period, confidentiality obligations, and intellectual property ownership. It should also include clauses around substitution rights and control that accurately reflect the true day-to-day working arrangement.

How do I pay a contractor correctly?

Pay against invoices submitted by the contractor's limited company or their umbrella company, depending on how they are set up. Do not put contractors through your company payroll unless the engagement has been formally determined as falling inside IR35. Agree payment terms upfront before work begins, typically 14 or 30 days from invoice date, and keep detailed records of all payments made.

What insurance should I check before hiring a contractor?

Ask for current proof of professional indemnity insurance, which protects against errors or omissions in the contractor's work and advice. Public liability cover may also be required if they will work on your physical premises or interact with your customers. Some businesses additionally require cyber liability insurance if the contractor will handle sensitive data or access internal company systems.

What is the difference between employing someone and hiring a contractor?

An employee works under your direction with guaranteed hours and statutory benefits such as pension contributions, paid holiday, and sick pay entitlements. A contractor delivers a defined scope of work, controls how and when they complete it, provides their own specialist equipment, and invoices your business for their services. The tax treatment, employment law obligations, and management approach differ significantly.

Can a business be penalised for getting IR35 wrong?

Yes. If HMRC determines that a contractor engagement was incorrectly assessed as outside IR35, the fee-payer in the contractual supply chain becomes liable for all unpaid PAYE income tax and National Insurance contributions, plus interest charges and potential financial penalties. For medium and large businesses acting as the end client, this liability falls directly on the hiring organisation.

How long can I hire a contractor before they become an employee?

There is no fixed time limit in UK law that automatically converts a contractor engagement into an employment relationship. Employment status depends entirely on the actual working practices and arrangements, not the duration of the contract alone. However, very long engagements with the same client do increase IR35 scrutiny, and it is good practice to formally review the arrangement at each contract renewal.

Need help with this for your business?

Book a free 20-minute call with one of our MAAT or ACCA qualified accountants. We will tell you honestly whether we can help.

203 5-star reviews

ACCA & AAT qualified

Set up in 24 hours