A brief introduction to consultancy
We have produced a number of Guides covering issues relating to the world of consultancy. The other Guides are as follows:
- What provisions can you expect to see in a consultancy agreement
- Legal status of consultants – legislation to be aware of
- How to work out whether a consultant is self-employed or an employee
- Consultancy and data protection
1. What is a consultant?
There is no special legal definition. The term can be applied to any person who provides their personal services to someone else, whether for a short term project or on a long-term ongoing basis. Usually the term is used when a client needs to engage someone with skills, knowledge or experience to provide services which are not available in its existing workforce. There may or may not be much actual ‘consulting‘ involved.
2. What are the main pros and cons of being an independent consultant as opposed to an employee (or worker)?
1. Pros for the consultant:
• The feeling of autonomy and independence (escaping from the corporate employee rat race)
• Ability to work for multiple clients, and to develop one’s own business relationships and personal business ‘goodwill’
• Flexibility and work-life balance
• More favourable tax treatment than for employees (eg business expenses; National Insurance contributions) – if you avoid IR35 etc
2. Cons for the consultant:
• Lack of job security and employment law protection
• Scary world of running your own small business
• Less certainty over earnings
• Potential business liabilities (requiring insurance; and/or operating through a limited company to limit personal liability)
3. Pros for the client:
• Flexibility – the client can engage the consultant on an as needed basis , and the consultancy agreement can be put on a more commercial contractual footing
• With a genuinely self-employed consultant or with a consultancy company the client doesn’t have to worry about all the statutory employment law obligations and liabilities
• The client shouldn’t have to worry about payroll accounting and employee tax and NI – IF the client can sleep at night comfortable that it has got around all the legislation designed to try to help the Revenue treat consultants as employees or workers!
4. Cons for the client:
• The client has less control over the consultant as the consultant does not owe all the ‘master-servant’ duties owed to an employer by an employee. The client can try to put various controls and obligations in the consultancy agreement but this then increases the risk that the consultant will be said to be an employee.
• Employees owe their employers implied duties of good faith, trust and confidentiality. A consultant doesn’t generally have such implied duties as regards their client.
• Intellectual property (IP) created by an employee is automatically treated as owned by the employer, whereas an independent contractor owns any IP he creates.
3. Self-employed, employee or ‘worker’ – why does it matter?
There are complex rules which determine how a consultant should be treated for tax and employment law purposes.
These rules depend on whether the consultant is to be treated as self-employed, an employee or a ‘worker’.
4. Why are the main pros and cons of providing consultancy services through a company?
1. Pros for the consultant:
• A company has limited liability
• Opportunities for more tax-efficiency using a company (for example, paying dividends). But the opportunities are drying out a bit…
2. Cons for the client:
• No direct contractual link with the consultant. A client may therefore want a separate side letter agreement with the individual consultant to cover issues such as intellectual property and confidentiality.
5. What provisions can you expect to see in a consultancy agreement?
An employment contract is known as a ‘contract of service’. A consultancy contract or any other services contract is known as a ‘contract for services’. It is a commercial agreement, and each party is free to try to impose whatever commercial terms they want. However, usually a balancing exercise is needed to include provisions which are strong enough to look after the client’s interests but not strong enough to result in the consultant being treated as an employee or worker.