Problems of engaging via a personal service company
- Matt Gingell
- Updated: Wed, 14th Dec 2016
We advised a UK based commodities trading company on the engagement of its trading staff. This was a complex case, encompassing employment status, tax liability, the application of IR35, the incorporation and enforceability of restrictive covenants and confidentiality provisions.
Summary advice: In a nutshell we advised against engaging via personal service companies for a variety of reasons as explained below.
Our UK client was the subsidiary of a multinational commodities company. This company provided trading services to other, offshore, group companies. The UK based traders were engaged as self-employed consultants, directly by our client.
The Group’s overseas in-house counsel instructed us to review the traders’ contracts. In addition, they wanted our advice concerning one trader’s proposal, namely that he be engaged through his own personal service company.
We reviewed the existing contracts and working arrangements. The contracts were inadequate, and didn’t protect our client’s interests.
In summary there was a significant risk that all traders could be deemed employees, for
- Purposes of tax liability;
- In respect of employment legislation.
Employment status can be complex to determine. Initially a common sense rather than a legalistic, expensive review of employees normal working practices reveals whether HMRC and/or an employment tribunals will :
- Deem workers to be employees;
- And not self-employed people working on their own account.
In this instance, there was a significant risk that the client had accrued, and continued to accrue, liability as the dealers’ employer, because the dealers:
- Contracted directly with the client to turn up and do the work themselves;
- There was no question that anyone else would do the work;
- They worked 9-5 Monday to Friday;
- Only ever worked for the client;
- Worked on a continuing, rather than a “when needed” basis;
- Had worked in this manner for some time;
- Had become part and parcel of the client’s organisation.
Of particular concern, whilst the dealers’ remuneration was commission, part of it was characterised as “guaranteed advance commission.” This amounted to fixed monthly payments which could not be recouped after payment, i.e. a salary. An entitlement to a salary is clearly indicative of employment, not self-employment.
The dealers enjoyed daily contact with important clients. The business depended upon these relationships. In addition, the dealers could access commercially sensitive information.
However, there were no covenants restricting dealers from poaching clients. Nor were there practical provisions to protect trade sensitive information, e.g. taking confidential documents off premises was not expressly prohibited.
In the round, working arrangements needed to be reviewed and new contracts put in place.
Use personal service company to engage workers
In the circumstances, we could only recommend our client accommodated the broker who wished to be engaged through his own pesonal service company. We advised that his colleagues should also be engaged on this basis.
Where workers are engaged through an intermediary company in which they have a material interest, then the client’s tax liabilities gain protection from IR35 legislation. So if an employment relationship was deemed to exist between client and worker, the intermediary company is liable for PAYE and NI, not the client.
In addition, where there is a contract in place between the client and a worker’s company:
- A court is less likely to consider there is a direct employment contract between client and worker; and,
- The client’s liability under employment protection legislation is thereby limited.
Together with the client we negotiated the trader’s agreement to being engaged through their own personal service companies. Such arrangements can be mutually beneficial:
- The broker who first asked to be engaged through his own personal service company would gain beneficial tax advantages. Even after incorporation and administrative costs there was a net financial benefit.
- The other consultants reached the same conclusion. They agreed to enter the proposed arrangement, subject to the terms of the relevant contracts.
Personal service company contract
The contract between a client and the personal service company requires careful drafting e.g:
- The contract should be for the supply of services. It should not be for the supply of personnel, particularly to avoid liability under the Agency Workers Regulations.
- Avoid provisions which are unnecessarily indicative of an employment relationship, e.g. fixed remuneration provisions.
- Include provisions to indicate a commercial rather than an employment relationship, e.g. the worker’s company should have, and bear the expense of, professional indemnity insurance.
It is particularly difficult to strike a balance between:
- Avoiding direct contractual relationship between the client and worker to limit liability for tax and employment protection;
- Binding the worker by important contract provisions, e.g. restrictive covenants and confidentiality obligations.
If only the worker’s company is bound by such provisions, then the provisions risk being wholly ineffective. The individual worker may well be able to circumvent them.
Ultimately, we and our client believed that our contract documentation:
- Properly reflected the commercial arrangement the parties agreed;
- Limited our client’s liability, particular liability for tax and employment protection;
- Protected our client’s legitimate business interests.