A self employed person is generally regarded as a consultant. There are broadly 2 methods of engaging a consultant, one is to engage the individual directly (a bipartite arrangement) the second is to engage them via a service company (a tripartite arrangement.) Our article considers the relative merits of these and covers our top tips when considering a self employed arrangement.
A self employed person is generally regarded as a consultant. There are broadly 2 methods of engaging a consultant, one is to engage the individual directly (a bipartite arrangement) the second is to engage them via a service company (a tripartite arrangement.)
Both of these arrangements assume that the individual is not an employee or a worker of the Company, though tribunals and HMRC will look beyond the wording on the contract and frequently conclude that a ‘self employed’ person is in fact a worker or, less frequently, an employee. Both workers and employees have rights to holiday pay and pensions, and income/fees should be subject to employers’ national insurance contributions and income tax.
For a Company (or an individual consultant) to defend the principle that the ‘self employed’ person is not a worker or an employee it is preferable to be able to show that they have been engaged to perform a particular specialist task and/or for a task of limited duration. If on the facts the individual works for a number of companies simultaneously or provides a specialist defined service a defined period of time they will be more likely to be self employed. Some examples:
- A double glazing company employs a self employed salesman, who works only for that Company for a period of years. This person is likely to be a worker or an employee.
- A maintenance company wins a contract to build a retaining wall and hires a suitably skilled bricklayer via a trades introduction website to complete the work in a 4 week stint. The brick layer is likely to be a self employed person.
- A training company hires a consultant to run a specialist ongoing programme on its behalf and under its direction, that person also conducts regular work for 2 other training companies in a similar manner. The consultant may well be regarded as a worker for all 3 companies.
Employed and worker status aside, which is better, to engage a consultant directly, or via a limited company?
Engaging an individual directly. This is the simplest method and the contract is straightforward. Under a bipartite arrangement a Company (“Client”) engages an individual (“Consultant”) to work directly for the Company. The individual will be expected to invoice the company directly and all income derived from the contract will normally be regarded as employment income for tax purposes. On the upside there is normally a clear accountability line for the individual’s actions and legal responsibilities. Put bluntly it’s clear who the Client can sue for any breaches. It is advisable then for the Consultant to hold relevant insurance both to protect themselves (e.g. against personal assets being seized) and to ensure that the Client is able to recover any losses arising from the Consutant’s breaches.
Engaging an individual via a limited company. In this slightly more complicated contractual model a Company (“Client”) engages an individual (“Individual”) via a contract with a company that employs that individual (“Consultant Company”.) The Consultant Company (in which the Individual is often the sole shareholder) will invoice the Client for the Individual’s services. The Individual will have more control on how to be paid, and may opt to receive tax efficient Director’s dividends – the contract income will not normally be regarded as employment income. The waters are slightly muddied here when it comes to who has accountability and who to sue – from the Client’s perspective it is very important to ensure that the written contract for services delegates adequate responsibility onto the Individual, and for this reason we would advise our clients to draw up tripartite agreements themselves (or rather for us to do it for them) – not rely on the Consultant Company to contract with the Individual.
Our top tips for engaging self employed people:
- Be clear that the arrangement is genuinely self employed and that another form or contract e.g. casual, temporary or fixed term (all of which denote worker or employee status) is not more suitable.
- If ‘self employed’ seems questionable consider paying holiday at least (the self employed plus model.)
- Always create your own tripartite agreement covering the responsibilities of all 3 parties.
- Review the contract regularly to make sure it is still relevant and a bona fide self employed arrangement.