A consultancy agreement is a contract for services between an independent contractor (normally a self-employed individual) and a client company for the provision of consultancy services.
Why use consultants?
Consultancy allows the company client to access a particular skills or expertise that it does not have within its existing workforce, without needing to spend time recruiting or training employees.
Consultancy is a more commercial and flexible relationship than employment, which makes it ideal where the company has a limited need for the skills or expertise that the consultant provides.
What is the difference between consultants and employees?
There are three categories of employment status in England & Wales: employee, worker and self-employed; consultants fall into the latter category.
The test for whether an individual is an employee or a consultant in this context will depend on three principle factors:
(i) whether there is “mutuality of obligation”, that is, whether the company client is obliged to provide work and pay in return for the individual being obliged to perform the work,
(ii) whether the company client has sufficient control over the individual, that is, the power to decide what is done, and how, and when and where it is done, and
(iii) whether the other provisions of the contract are consistent with an employment or a consultancy relationship.
Great care must be taken when drafting consultancy agreements to ensure that a consultant is not termed and/or considered to be an employee because the courts will take a holistic view of the relationship, including what happens in practice as well as the terms of the agreement, to decide whether an individual is an employee or self-employed.
Some key considerations when drafting consultancy agreements
The courts will frequently look beyond the terms of the consultancy agreement, when determining whether a consultant is to be considered anything more than self-employed and any consultant who is not genuinely self-employed could be considered an “employee” or a “worker” for the purposes of section 230(1) and 230(3) of the Employment Rights Act 1996.
In an ordinary consultancy relationship, the consultant will be required to account for their own income tax by self-assessment and there will be no liability on the consultant or the client for class 1 National Insurance Contributions.
However, in certain instances the consultant may need to register for VAT if their business turnover exceeds the current VAT threshold. Tax status is always an important consideration for the consultants and the company client as HMRC may deem the consultant to be an ‘employee’ for tax purposes, even though they would not be considered an employee for employment law purposes.
Consultancy via a service company
Where the consultant provides the consultancy work through a service company, HMRC may assess the arrangement as falling within IR35; a tax regime designed to eliminate tax avoidance where intermediaries are used.
Much like a senior employee, the client may wish to protect its commercial interests by imposing restrictive covenants on the consultant, to apply for a limited period after the consultancy arrangement has terminated. A consultant may build up close relationships with the client’s customers, suppliers and employees.
Great care must be given to drafting restrictive covenants as imposing post-termination restrictive covenants on a consultant may suggest a level of control which is commensurate with an employment relationship (see Pimlico Plumbers Ltd v Smith  UKSC 29 for a detailed commentary on the subject).
In the consultancy relationship there is no presumption that the ownership of any intellectual property created by a consultant in the course of his engagement will automatically vest in the company client. Quite to the contrary, in the employment context the ownership of any intellectual property created by an employee during the course of employment will generally vest in the employer (see section 11(2) of the Copyright Designs and Patents Act 1988 and section 39(1) of the Patents Act 1977).
The consultancy agreement should be drafted very carefully to specify whether the intellectual property rights in the work produced is transferred to the client or retained by the consultant and if it is retained whether it will be licensed to the company client. Licences may be granted on an exclusive or non-exclusive basis.
Consultants are generally under no implied obligation of confidentiality, for this reason solicitors acting for the company clients will frequently advise on the inclusion of a confidentiality clause in a consultancy agreement.
On 25 May 2018, a new regime for data protection came into force in accordance with the General Data Protection Regulation ((EU) 2016/679) (GDPR) and the Data Protection Act 2018 (DPA 2018), which replaced the Data Protection Act 1998 (DPA 1998) consequently consultants will have rights as data subjects, as well as possible obligations as data processors.
When it comes to engaging new consultants or renegotiating contracts with existing consultants, we can advise on the most effective strategy for your business.