Face up to arms-length tax rules

EMPLOYEES COME WITH two expensive price tags. The first is a raft of statutory rights, such as the right not to be unfairly dismissed. The second is employer's National Insurance Contributions, currently charged at 13.8% of earnings and paid by the employer. Businesses are well aware of this and accountants and other advisors will be all too familiar with the refrain "let's make him a consultant then".

Most advisors will know that such a transformation is not easy to achieve and that the manner in which the parties describe themselves (and their intentions) will not be decisive if, in reality, the consultant is treated no differently from employees carrying out the same job.

Similarly, the fact that the parties choose to operate their relationship as one of self-employment for tax purposes (for example, invoicing for services with VAT applied) does not mean that a court or tribunal will find that no employment exists.

The question of if an individual is an employee is not easy to answer. One important factor is whether or not the individual providing the services in question has the right to appoint a substitute. This is considered to be inconsistent with being employed, on the basis that an employee is obliged to perform work personally.

Disregarded terms

However, in Autoclenz Ltd v Belcher & Ors, the Supreme Court (the "court") upheld the Court of Appeal's decision that car valets, whose contracts stated that they were self-employed, were actually employees. This was the case even though the contracts contained an express term allowing the valets to appoint a substitute. The court clarified that express contractual terms may be disregarded (which in this case it did) where they do not reflect the parties' actual agreement. This could be wholly innocent and an intention to deceive a third party was not required.

Determining the correct status of some consultants will undoubtedly remain a hotly contested area of law. The classic test is found in the case Ready Mixed Concrete v Ministry of Pensions: a 'contract of employment' exists when:

• Work is performed personally for wages or other remuneration;
• The work is controlled by the other party to the contract; and
• The employer is obliged to provide work and the employee to undertake work personally.

Autoclenz has made it even more difficult for businesses to avoid the breadth of the above test simply by virtue of the label that it applies to its arrangements. In light of this decision, businesses and their advisors should look more closely than before at the use of personal service companies. Interposing such a company between contractor and client remains the only reasonably watertight way to ensure that the individual contractor is not found to be an employee.

The use of such a service company should prevent an employment tribunal from finding that an individual contractor is an employee. Moreover, under the IR35 rules, the risk of liability for PAYE income tax and National Insurance contributions rests with the individual and their service company rather than the client.

Michael Bronstein, partner, and James Davies, associate, global employment group, Salans LLP