How to Convert an Employee to a Contractor
Convert an employee to a contractor by ending the employment relationship properly (with notice and final payments), allowing a clean break, then engaging the individual on a genuinely self-employed basis with a contractor agreement that reflects the true working relationship.
Last updated: February 2025
Step-by-Step Guide
Assess whether genuine self-employment is achievable
The working relationship must genuinely change. The individual must have the right to substitute, control over how work is done, and bear financial risk.
- •If nothing changes except the contract label, HMRC will treat them as an employee.
End the employment properly
Serve notice, pay all outstanding salary, accrued holiday, and any contractual entitlements. Provide a P45.
- •Allow a genuine break between employment ending and the contractor arrangement starting.
Draft a contractor agreement
Create a services agreement that reflects the genuine self-employed nature of the relationship, including substitution rights, no mutuality of obligation, and payment for deliverables.
- •Avoid terms that mirror employment such as holiday pay, sick pay, or fixed hours.
Conduct an IR35 assessment
Use HMRC's CEST tool and consider obtaining a professional IR35 review to confirm the arrangement falls outside IR35.
- •Document the assessment and retain it for HMRC inquiries.
Ensure ongoing compliance
Monitor the working practices to ensure they continue to reflect self-employment. If the individual works exclusively for you on fixed hours, the arrangement may be challenged.
- •Review the arrangement annually against IR35 criteria.
Legal Requirements
Employment status is determined by the reality of the working relationship, not the contract label, as established in cases like Autoclenz v Belcher [2011] UKSC 41. The off-payroll working rules (IR35) apply to medium and large businesses engaging contractors through intermediaries. Employers must also comply with employment termination requirements including notice and final payments.
Common Mistakes
Template / Example
When to Get a Solicitor
Strongly recommended due to the significant tax and employment law risks. HMRC actively investigates arrangements where employees are converted to contractors.
FAQ
Can HMRC challenge an employee-to-contractor conversion?
Yes. HMRC can investigate and reclassify the individual as an employee for tax purposes if the working relationship has not genuinely changed. This can result in back-taxes, penalties, and interest.
Should I allow a gap between employment ending and contractor work starting?
It is strongly advisable. A clean break demonstrates that the old relationship has genuinely ended and a new one has begun on different terms.
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