ARTICLE
19 April 2024

Are You Sleepwalking Into Significant Liabilities In Relation To UK Based Consultants?

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Bates Wells

Contributor

Bates Wells
Many US organisations appoint self-employed consultants to scope out the merits and practicalities of carrying out operations in the UK.
UK Employment and HR
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Many US organisations appoint self-employed consultants to scope out the merits and practicalities of carrying out operations in the UK.

While this often makes good sense, if a decision is subsequently taken to actively carry out those operations, the consultant is often the person who takes that on and so their role evolves. This evolution can lead to them moving from being a self-employed consultant to being something more.

In the UK, that "something more" is either a full-blown employee or a worker – a category which sits between self-employed and employee. As in the US, the rights of, and obligations towards, each category differs.

This happens because in the UK the label the parties use in consultancy agreements or any other documentation governing the relationship does not determine the status of the parties. Instead, it is the reality of the situation and what happens in practice that matters. So, when that changes over time, so too does the status of the individual concerned.

A range of factors are relevant and ultimately much depends on the control the organisation has over the individual, whether there is a mutual obligation to offer and do work, and whether personal service is required. These are usually absent in a genuine consultancy arrangement but present in an employment or worker relationship.

If this change in status is recognised in real time or at least quickly, the necessary arrangements can be put in place to ensure the organisation complies with all its new obligations.

However, if that does not happen and if the self-employed consultancy arrangements carry on, despite the change in status, liabilities can mount up and over time (sometimes years) those liabilities can be significant.

For example:

  • If a contractor is later deemed to have been an employee from a certain point in the contractor relationship, the organisation would be liable for backdated tax, including income tax and social contribution, i.e., employer's national insurance contributions (NICs). No credit for any tax paid by the individual on a self-assessment basis and any payment from the organisation to the contractor will be treated as net of tax and NICs and so would need to be grossed up to calculate the tax due. There could also be interest and penalty fees, ranging from 0% to 100% of the tax due.

No credit for any tax paid by the individual on a self-assessment basis and any payment from the organisation to the contractor will be treated as net of tax and NICs and so would need to be grossed up to calculate the tax due.

There could also be interest and penalty fees, ranging from 0% to 100% of the tax due.

  • The organisation may also find that it is in breach of its obligations in respect of UK pension requirements. In these circumstances the organisation would need to rectify matters by setting up a pension scheme and paying into it a sum to represent the contributions which would have been put in had the individual been an employee or a worker. This would be a percentage of the individual's earnings and the organisation may also need to pay in a sum to make up for the lost investment value.
  • The organisation may also find it has failed to put in place compulsory employer's liability insurance and if the "employee" caused someone else harm the organisation could be liable but would not have any insurance cover.
  • Furthermore, and to compound the problem, not having appropriate pension and employer's liability insurance in place can be a criminal offence.

It is critical therefore, for all organisations with UK based consultants, to take stock and determine if the status of them has changed, such that the additional liabilities have arisen. If they have, steps must then be taken to rectify and regularise the position.

The process of determining the status and the point at which it changed requires a careful consideration of the evolution of the relationship and specialist advice on the impact it may have had. Without that advice, an organisation could end up with unlawful, and potentially costly arrangements.

Further, transitioning a consultant onto an employment or worker contract can be difficult for organisations to navigate. It is important to ensure that the documentation reflects the reality of the relationship, and it is, of course, better to resolve issues sooner rather than later.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
19 April 2024

Are You Sleepwalking Into Significant Liabilities In Relation To UK Based Consultants?

UK Employment and HR

Contributor

Bates Wells
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