Taxation has never been a more contentious issue.
Political arguments have been raging for months now over everything from the 50p rate and tax evasion among high earners to the reintroduction of a £10,000 threshold for people on low incomes.
Also to hit the headlines recently, however, was the case of Ed Lester, chief executive of the Student Loans Company who, rather than being employed directly by the organisation itself, had been engaged as a consultant through the vehicle of his own private company.
While there was no suggestion that Lester or the SLC acted unlawfully in these arrangements (in fact, the manner of his appointment was sanctioned by HM Revenue & Customs), that government officials are able to structure their working arrangements to avoid paying income tax or contributing to social security payments in the same way that their employees are expected to has inevitably caused controversy.
A Treasury review of the extent to which civil servants channel their salaries into tax-efficient private firms will also look at more than 4,000 postings across Whitehall and its quangos – and it is expected to conclude that such arrangements must end for full-time permanent staff.
It is widely acknowledged that, in the right circumstances, such arrangements can be entirely appropriate. But the intention behind the review is to distinguish between those arrangements that are appropriate and those that are clearly not.
The review is also exploring whether the individuals concerned are genuinely operating as self-employed consultants or whether they are really employees trying to take advantage of the benefits afforded to consultancy relationships.
When considering arrangements of this type it is, therefore, important to bear in mind the key implications from both a tax and employment law perspective.
While being engaged as a consultant may carry with it certain cash-flow advantages and enable expenses to be set off against income, it is not necessarily to an individual’s advantage to shy away from employment status.
Employee versus consultant
There is a whole raft of legislation affording personnel specific employment rights such as paid holiday, maternity leave and pay, entitlement to redundancy payments, minimum notice periods and protection from unfair dismissal, to name but a few.
Self-employed consultants, on the other hand, are not entitled to these enhanced statutory rights or protections.
In addition to statutory rights, an employer/employee relationship also implies a duty of trust and confidence between the parties concerned and suggests that neither should act in such a way as to undermine it.
This notion introduces the idea of reasonableness into the way in which employers treat their employees. But the relationship between an organisation and a self-employed consultant does not have the same implied duties, with the consultant’s protection relying largely on the contractual terms in place. This means that consultants have fewer rights than employees.
An individual’s status, meanwhile, is likely to be scrutinised in two ways: first, the financial arrangements between the parties concerned may be investigated by HMRC from a tax perspective.
Secondly, a given consultant may try to argue that they were an employee in order to pursue a claim at an employment tribunal. In either case, the individual’s employment status would be a question of fact for either HMRC or an employment tribunal to determine.
So, what makes an individual an employee or a consultant? Unfortunately, there is no all-encompassing definition of either and the assessment of an individual’s employment status would have to be based on the evaluation of a number of factors.
While the parties concerned may enter into a contractual relationship that supports the individual’s engagement as a consultant, this scenario would only be one indicator of their status. An employment tribunal would also look behind the documentation in order to establish the actual nature of the relationship.
The key factors that should be considered when determining employment status are set out in the case of Ready-Mixed Concrete (South East) Limited v the Minister of Pensions and National Insurance.
As a starting point, there are three key areas that should be evaluated:
(i) a requirement for personal service
(ii) the existence of mutuality of obligation
(iii) the level of control that the company has over an individual.
Personal service – Is the individual personally required to perform services for the company? An employee is someone who is employed under a contract of service, that is, a contract that requires them to personally turn up for work and carry out the duties requested of them.
A consultant, on the other hand, is engaged under a contract for services, that is, a contract under which they agree to provide the company with particular services. But, while they are obliged to ensure that these services are provided, they are not necessarily required to carry out the work personally.
Mutuality of obligation – Are employers obliged to offer individuals work under their agreed contract? Equally, if an employer offers an individual work, are they obliged to accept it? If they are, it could indicate an employment relationship.
Control – How much control does the employer have over an individual? Who decides what work needs to be done, how it should be done and when?
There are also a number of other factors that could be taken into consideration such as who provides the equipment to carry out the work agreed. If it is the company, it could indicate employment, whereas if it is the individual, it points to a consultancy arrangement.
What happens when the individual is off sick or takes a holiday? Is it paid and would they have to comply with normal procedures in these circumstances? If holiday or sickness absence is unpaid, it could indicate a consultancy arrangement.
Finally, how integrated is the individual into the business? Do they attend the same training courses, briefings and meetings as employees? Who bears the financial risk? Does the appointment relate to a particular project or can the individual work for others? Both scenarios would indicate self-employed status.
While no one factor will be determinative, the greater the degree of personal responsibility that the individual assumes in the relationship, the more likely it is that they are engaged in a consultancy rather than an employment arrangement.
To add a further layer of complexity, however, HMRC uses different, albeit similar, criteria when determining individual’s employment status or otherwise. This means that an individual could be considered an employee for tax purposes, yet remain a consultant from an employment perspective.
However, if the consultant’s services are provided through a service company, IR35 regulations would mean that the tax risk falls on the service company rather than the hiring organisation.
In addition to the legal factors set out above, it may be that the government review will, to some extent, be influenced by public pressure for senior government officials to be treated in the same way as employees generally.
To that end, it now appears that Lester works for SLC as an employee rather than a consultant and is having tax and social security contributions deducted at source. It is expected that many of the consultancies across Whitehall will follow suit and that, following this review, such arrangements will, no doubt, be more rigorously controlled from the outset.
Shelley Crofts is an associate in law firm Burges Salmon‘s employment team.
