Consultancy Agreement Notes Apr 4, 2013Views: 1101
A Consultancy Agreement is a contract for services between an independent contractor (a self-employed individual) and the client for the provision of consultancy services.
A consultancy arrangement may be an attractive option for both client and consultant, in part because of the tax advantages. However, the fact that an arrangement is structured and documented as a contract for services and not a contract of employment is not conclusive evidence of the relationship between the parties; HMRC and the employment tribunal will look at the substance of the relationship, rather than the legal form or any labels that the parties have given to the relationship. In other words, a Consultancy Agreement is not a contract for services if the substance of the underlying relationship suggests otherwise.
Establishing whether the consultant is employed, self-employed or a worker is very important because the status of the consultant will set out:
• the basis on which the consultant's income is taxed;
• whether the client will be required to make deductions of income tax and employee NICs) from the consultant's fees and pay employer's NICs;
• whether the consultant will have the benefit of various employment protection rights available to employees, or the more limited rights available to workers;
• whether the individual is owed the common law and statutory duties relating to health and safety owed by an employer to its employees or whether the individual (as an independent contractor) is responsible for their own safety.
There is no single test for determining employment status but there are a number of criteria that are considered when deciding whether a person can be said to be an employee. In determining employment status the employment tribunal and HMRC will look at the substance of the relationship, rather than the legal form or any labels that the parties have given to the relationship. However, there are three fundamental conditions that must be met for an employment contract to exist:
• the individual must provide his own skill and work in return for pay ("personal service");
• there is a sufficient degree of control of the individual's activities ("control");
• the other provisions in the contract are consistent with it being a contract of employment ("other factors").
It is important to note that when issuing a consultancy agreement to a former employee, the client should try to make the terms as different as possible to the terms of the previous employment contract, as if the nature of the work is similar to that previously carried out on an employment basis, the consultancy arrangement may be deemed to be a continuation of the employment relationship
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