Given the inherent complications in the new tax legislation for fixed share LLP members, it is tempting to side-step the rules by engaging an individual as a consultant rather than an LLP member. This is particularly the case for LLP members who are nearing retirement and looking to withdraw from the LLP, not take on more risk and increase their investment!
It is the firm’s responsibility to assess whether a consultant is genuinely self-employed or in fact an employee. Incorrectly treating the individual as self-employed can be very expensive, as HM Revenue & Customs will seek to collect the PAYE tax and National Insurance from the firm, possibly going back a number of years. A tax indemnity in the contract may offer protection, but it is better to get it right from the outset.
There is no single test to determine an individual’s status, and in recent cases the courts have taken into account a range of factors when giving their ruling.
The ‘what, when, where and how’ of the services to be provided. Employees are subject to supervision and control by the employer whereas consultants can decide what work to accept, what hours are needed to deliver the services, where to do it (at home, at the firm’s offices, somewhere else) and how best to perform the services.
Substitution and assistants
Employees are engaged for their personal service and assistants are provided by the firm, whereas consultants may be able to provide a suitably qualified and experienced substitute in their place and may engage assistants at their own expense.
Consultants generally provide their own equipment (computer, mobile phone) and incur their own overheads (PI insurance, practising certificate, training) whereas the firm provides these for employees . A consultant might be required to reimburse the firm for these costs or make a contribution towards them where the firm pays the cost centrally.
Employees are expected to work exclusively for the firm, whereas consultants may be engaged by more than one firm.
Consultants may be paid an hourly or daily rate in arrears and on presentation of an invoice, provided they are only paid for hours/days actually worked. Employees may be paid weekly or monthly and may benefit from overtime, bonuses, holiday/sick pay and pension provision.
Integration into the business
Employees are integrated into the business, i.e. their own desk/office, a job title within the firm’s hierarchy, a firm’s email address and they may be responsible for managing/supervising other employees. Consultants remain independent.
When looking at the last point it is important to consider the following: Does the consultant act like an employee? Do they use the same system logins and passwords, attend the same functions and adhere to the same internal procedures? If you find a consultant reading the employee handbook you may have a problem!
The consultancy contract is just the starting point. Getting the terms right is important, and they must be replicated in practice. If the actual relationship between the consultant and the firm differs from the contract, the wording will be ignored by the courts.
Finally, if a consultant operates through a limited company then the above factors still apply, but the risk of getting it wrong then lies with the company rather than the firm.
Consultancy contracts can vary significantly from one engagement to the next and we have a wealth of experience advising firms on how to get it right from the start.