Consultancy agreements play a pivotal role in defining the working relationships between clients (usually a business), individual consultants and personal service companies (PSCs). The aim of a consultancy agreement is to establish the rules of engagement, duties, and responsibilities between the parties, while also addressing the critical issue of employment status (particularly in relation to IR35 legislation).
A consultancy agreement is a legal contract that protects the interests of both the consultant and the client. They provide a clear framework for the consulting relationship, helping to prevent misunderstandings and disputes.
When do you need a consultancy agreement?
Consultants often work independently as self-employed consultants or freelancers. An individual consultancy agreement is a contract between an individual consultant and a client. You might engage with an independent consultant who has specialised skills and expertise that isn't available in your employee workforce. This could be a short or long-term arrangement. You may also engage with a consultant on project-based basis for a fixed period of time to help with team capacity etc.
A personal service company (PSC) is a separate legal entity established to provide the services of an individual consultant. PSC consultancy agreements are designed to specifically accommodate this business structure. PSCs can offer tax advantages, making them an attractive option for consultants. Some clients may prefer to engage with corporate entities, like PSCs, for various reasons, such as compliance or administrative simplicity. Beware that using a PSC can also limit personal liability against the consultant. The consultancy agreement ensures that any legal obligations or disputes are directed toward the company, protecting personal assets of the consultant as an individual.
What do you need in a consultancy agreement?
It's really important that the parties involved are clearly defined, and more specifically whether the consultant is an individual or PSC. We'd also expect to see a detailed description of the services to be provided by the consultant and the duration of engagement (if this is applicable). The consultancy agreement should address confidentiality and how any accessible sensitive information will be protected as well as clarifying ownership and usage rights of any work produced during engagement.
The arrangement should also formalise the compensation details as well as setting any payment schedules and rules around additional expenses etc. Nobody wants to be thinking about the end before anything has even begun but it's crucial to formalise the conditions under which either party can terminate the agreement and also establish the procedures for resolving conflicts and disputes, should they arise.
What is the significance of IR35 legislation and consultancy agreements?
IR35 was introduced to address what the government perceived as tax avoidance and unfair employment practices within the consultancy sector. The legislation was designed to tackle the issue of “off-payroll working”, where individuals who would otherwise be classified as employees engage in work as a consultant to reduce their tax liabilities. The ultimate objective of IR35 is to ensure that individuals who were, in essence, working as employees would be taxed and be entitled to various employment rights, regardless of the contractual arrangements they used.
IR35 doesn’t apply to consultancy agreements where a client engages with an individual consultant directly. The responsibility for determining the employment status of individuals engaged in consultancy agreements lies with the engaging client (you). This means that you must assess whether the individuals you're engaging with should be classified as employees. To determine this, clients should consider employment factors such as control, substitution, and mutuality of obligation. There is also a useful online test (CEST test) which you can use to check employment status.
Given all the concern around IR35, it may sound strange, but small businesses may prefer to engage with corporate entities, such as PSCs, due to IR35 compliance concerns. This is because, when the client is categorised as a small business, the PSC (i.e. the intermediary) is required to determine whether the arrangement meets the employment factors and therefore deemed an employee, rather than the business/client. However, this isn't the same for medium or large private sector organisation. You could of course seek to address this risk in any consultancy agreement by way of indemnities, but it is certainly worth considering before you enter into the relationship.
How can we help?
If you want to discuss individual consultancy vs PSCs, learn more about IR35 complications or get some help drafting a water-tight consultancy agreement - get in touch with the team.
Rachael is a diamond and very intelligent. She has a lovely style and an efficient, commercial & more collaborative approach to advising clients. It's also reassuring to know that Rachael is a former litigator so you know you are getting all-round excellent commercially sound advice. Highly recommended!
Having negotiated against Alice personally, we were confident of her legal skills and commercial acumen. They immediately submersed themselves into our business, acting as an extension of our legal team. They worked incredibly hard, are friendly, approachable and above all could always be counted on to retain a sense of humour.”
Rachael is commercially focussed, and her investment in taking the time to get to know our business means she takes a pragmatic, human-centric approach to negotiations. She proactively gets her head around the particular priorities and constraints on each engagement, meaning she hits the ground running adding value while being able to move at pace.
“Plume is anything but your traditional law firm. We found the lawyers to not only be experts in their fields, but dedicated to understanding our business, which is so important to finding innovative solutions to the problems that we bring to them. Every single person I’ve met at Plume has been a delight to work with, and that just makes all the difference. I really do feel in very good hands working with Plume.”
It’s just the entire way that Plume does business. I’ve never felt forgotten, I’ve never felt that someone else is too important, everyone’s so nice and everyone puts in 100% of the effort. Working with Plume is a real pleasure.
Our favourite thing about working with Plume is it doesn’t feel like we’re working with a law firm but rather an extension of our own team. The lawyers have become so embedded in our business, so commercially focussed and so tuned to our risk appetite and way of working
The best thing about working with the Employment team is the prompt guidance and support they have given with sensitive and complex issues. They offer professional and diligent advice as well as being incredibly genuine and encouraging. It is reassuring to know they are on hand to help at all times.
Everyone internally has been incredibly impressed with your work and I'm sure we will want to continue working together long-term.
Plume is quite clearly the best law firm in the history of the universe. With trademark protections bestowed upon us by your godly lawyers, we'll be able to focus on what we do best.... developing awesome medical technology for the blind community.
Quickly understood my requirements, carried out a thorough review of the facts and produced a user-friendly reference document tailored to my business which demonstrated a strong grasp of the commercials. Take on was pain-free and everyone was friendly and responsive. Would recommend.
Excellent firm. Professional and ideal for start-ups.
The team have supported us with day-to-day and strategic legal advice throughout the year. We're grateful to them for stepping up to support us through this important milestone in MyTutor’s development and for their commitment in getting the deal over the line.
We currently use Plume for our small business and have had a great experience! They are knowledgeable, professional and answer in a timely fashion. Would recommend!
Great working with the folks at Plume. The quality of their work was top notch, their communication was effective and overall happy with the services provided.
You are without a doubt the COOLEST law firm ever, and we love working with you! <3
They're doing amazing stuff on social media and standing out from the crowd. This is a gold standard in disruption.
You are continuing to shape the legal industry to be more creative, compassionate, and (most significantly) human. Keep breaking down barriers - your reach is further than you may realize 🦩
The team have come on board to support MyTutor, a fast growing EdTech business which previously had no in-house legal resource. The team have made a hugely positive difference in a short space of time and we feel incredibly supported by the team, who offer a commercial, low fuss and highly responsive service
Plume are a wonderful, professional and caring law firm. The communication and attention to detail we received by them in dealing with our case was brilliant. I will definitely be using them again for future needs.
The team provided excellent leadership and support throughout our funding process. In particular, they provided comprehensive ownership and management of the close process for AccelerComm, providing excellent, professional guidance from start to finish and enabling AccelerComm to focus on growing core business growth