1. Why does it matter?
There are complex rules which determine how a consultant should be treated for tax and employment law purposes, which depend on whether the consultant is to be treated as self-employed, an employee or a ‘worker’.
2. How do the rules work?
To be genuinely self-employed, you need to be ‘in business on your own account’.
There are various tests which are used to decide this.
3. Differences in tax treatment.
If you are employed, you are taxed as an employee, and your employer is responsible for accounting for this tax and for both employers’ and employees’ National Insurance Contributions.
If you are self-employed, you have to account for your own tax on a sole trader basis.
Through a PSC:
If you operate through a company you own (a ‘personal service company’ or ‘PSC’) you have to look at tax from the company’s angle and from your own angle as (usually) an employee of the company.
There is various legislation under which a consultant might be treated as a ‘worker’; for example, the Employment Rights Act 1996, the National Minimum Wage Act 1998, and the Working Time Regulations 1998.
There can be grey areas as to whether someone is to be treated as an employee or worker. The main test is that employees are obliged to accept all work given to them by the hirer, whereas workers have autonomy to work to suit their own schedule.
There can also be grey areas as to whether someone is to be treated as a worker or a self-employed consultant. The main test is that in reality (ie not just looking at what the contract says) workers have to do the work themselves, whereas consultants have the option to appoint substitutes.
Workers may be taxed on PAYE on some assignments and not on others, depending on the various tests being applied to each assignment.
Protections for workers under this legislation include:
• National minimum wage
• The right not to suffer unlawful deductions from wages.
• The right not to suffer a detriment for making a protected disclosure (aka whistleblowing).
• The right to minimum rest breaks, annual leave and maximum working hours.
• Holiday and sick pay
• From 6 April 2020, the right to receive a written statement of employment particulars.
• The right for a consultant who works on a part-time basis (as many do) the right not to be treated less favourably than a comparable full-time worker.
Workers do not have some protections which employees do have, such as:
• Redundancy and unfair dismissal protection
• Parental leave
• Rights under TUPE on a transfer of business (generally)
5. Operating through your personal service company – IR35
IR35 is a tax regime designed to eliminate tax avoidance where intermediaries are used. It provides that where an individual is providing a personal service for the client through a personal service company, but would have been an employee for tax purposes if they were engaged by the client, HMRC will tax the individual’s earnings from the client as though they were employed by the service company.
This means that the PSC is responsible for deducting income tax and NICs through PAYE on the basis that the consultant is an employee of the company.
6. PSCs – new off payroll working regime for public authorities
The government introduced a new regime on 6 April 2017 for payments made to intermediaries (which can include partnerships and individuals as well as PSCs) by public authorities and those acting on their behalf for the supply of workers who would, if the intermediary were not involved, have the characteristics of employment. The result is that all payments made to intermediaries in providing the services of an individual to perform services personally for a public authority, or in relation to contracts with agencies and third parties that contract with an intermediary to supply the services of a worker, are subject to deduction of payroll taxes if deemed employment status applies. Such contracts no longer fall within IR35. So it is the public authority and not the PSC which is now primarily responsible for dealing with the tax.
HMRC have also published an employment status checker for the purposes of determining whether the IR35 (intermediaries) legislation will apply to a particular set of facts.
7. Impending new payroll working regime for larger companies.
The government committed to extending these “off payroll” reforms to the private sector to ensure that individuals who effectively work as employees are taxed as employees even if they choose to structure their work through a company. The rules will only apply to large and medium-sized businesses, with the existing IR35 rules continuing to apply to small businesses. The due date for implementing these reforms is 6 April 2020.
8. Operating through a managed service company (MSC).
A similar outcome to the IR35 regime can also apply if the consultancy arrangement falls within the MSC tax regime. This applies where an individual is engaged through an intermediary company (the MSC) whose business consists of providing the services of individuals to other persons, and where the MSC is required to pass most of the payments it receives for the provision of the services to those individuals, who would receive a higher amount than if the payments were taxed as employment income (if not for the MSC legislation).
The effect of the MSC legislation is that all payments received by the individuals providing their services through MSCs are subject to income tax and NICs, with the PAYE obligation falling on the MSC.
The regime is different to IR35 because the individual in an MSC is not usually on business on their own account (it’s not their own company), and the MSC provider (not the worker) controls the business. There is also no need to establish whether the individual would have been an employee of the client if they had been engaged directly (as there is for IR35).
9. Recruitment industry legislation
The recruitment industry in the UK is regulated by two main pieces of legislation: the Employment Agencies Act 1973 (‘EAA 1973’) and the ‘Conduct Regulations 2003’. These impose all sorts of rules aimed to protect employees and workers.
The EAA defines ‘employment businesses’ and ‘employment agencies’. Broadly, employment businesses engage employees or workers to work for other people (with whom the worker won’t usually have any contract); whereas employment agencies find or place people to work as employees or workers of other people.
The legislation can get a bit confusing because it sometimes refers to employment businesses as ‘agencies’ and to workers engaged by employment businesses as ‘agency workers’.
Some of the rules include:
• Quality control: employment businesses and agencies must take steps to ensure that workers are properly matched to, are suitable and can legitimately work for hirers
• Controls over certain terms which the contract with the worker must or mustn’t include
• Rules preventing employment businesses from refusing to pay their workers unless and until the employment business has been paid by the client
• Rules regulating whether an employment business is allowed to charge a fee to a hirer where the hirer directly engages a worker.
Workers for the purposes of the Conduct Regulations 2003 includes personal services companies (PSCs). Regulation 32(9) allows PSCs to opt-out completely from these Regulations.
10. Agency Workers Regulations 2010
If a consultant is engaged by an employment business as an agency worker (ie a worker not an independent consultant) the Agency Workers Regulations 2010 will apply. (This legislation can seem a bit confusing because it refers to employment businesses as ‘agencies’.)
These regulations say that after 12 weeks on an assignment the worker is entitled to receive the same basic working and employment conditions from the hirer as staff who are directly employed by the hirer.
There is currently an exception to this, which is due to end in April 2020. This is known as the ‘Swedish Derogation Agreement’. It involves the agency and the worker entering into a contract of employment between themselves before the worker goes on any assignment. This contract must set out certain details if it is to successfully operate as an exception to the Regulations, for example relating to:
• Minimum rates of pay
• Likely work location(s)
• Expected hours of work
• Minimum (no less than 1) and maximum hours per week
• Type of work
11. Commercial Agents Regulations
A consultant can sometimes be a “commercial agent” under the Commercial Agents (Council Directive) Regulations 1993 (SI 1993/3053) (Commercial Agents Regulations). The Commercial Agents Regulations apply to all self-employed “intermediaries” with “continuing authority” to negotiate or conclude the sale or purchase of goods on behalf of another. Key features are that:
• Agents are entitled to the same remuneration as other agents who are engaged to sell the same goods and who are operating in the same area.
• On termination of the agency arrangement, the agent is (in addition to any damages for breach of contract) entitled to either an “indemnity” (which is a payment the parties agree represents a certain amount of forecast loss) or, if no indemnity has been agreed, compensation for damages which the agent suffers as a result of the termination. There is no duty to mitigate in either case.
• Minimum notice periods are implied into any agency arrangement. The minimum notice required from either party is one month during the first year of the agreement, increasing to two months during the second year and three months in the third and subsequent years. It is possible to agree a longer notice period, provided that the principal does not have to give less notice than the agent.