Consultant or employee? The single-client contractor
Ravi, 42, is a software engineer. For the past 18 months he has worked full-time for one bank through Ravi Consulting Ltd, his wholly owned company. The contract says the bank can terminate with 30 days' notice. Ravi must work core hours in the bank's office, use the bank's laptop and systems, and report daily to a bank manager. He cannot send a substitute unless the bank approves, and the bank has never approved one. He is paid a fixed daily rate, invoices monthly, and bears no financial risk if the project overruns. He has no other clients and markets himself only through the bank's badge. Ravi takes a £2,000 monthly salary from the company and the rest as dividends. The bank is a large organisation. HMRC has opened an enquiry into the company's contracts. Ravi says he is obviously self-employed because he has his own company.
1. Applying the indicia of employment, assess whether the engagement would be treated as employment for tax purposes if the contract were between Ravi and the bank directly.
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The label 'self-employed' and the existence of a company are not decisive. The tribunals look at the reality of the relationship. Here the indicators point strongly to employment: the bank controls when and where Ravi works, he is integrated into the bank's team and reports to a manager, he must work personally because substitution is subject to bank approval, the bank provides the equipment, and Ravi bears no financial risk. A single client, a fixed daily rate and a long full-time engagement also suggest a dependent relationship. The fact that he invoices through a company does not change the underlying nature of the engagement. If the contract were direct, HMRC would likely succeed in arguing employment. The same factors feed into the off-payroll working rules.
2. Explain the PAYE/NIC consequences if the off-payroll working rules apply, and how the £2,000 salary and dividends are treated.
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Because the bank is a large organisation, the off-payroll working rules are likely to apply. The bank, as fee-payer, must decide status and, if the engagement is employment, calculate deemed employment income from the fees paid to Ravi Consulting Ltd and operate PAYE and employee NIC, plus employer NIC. The deemed employment income is not simply the company's profit; it is based on the fees for the services, with limited deductions. Ravi's £2,000 salary remains taxable on him as employment income, and the dividends remain distributions taxed as dividends. The company can deduct the salary for corporation tax. The key point is that the tax/NIC cost rises because employment income bears NIC, whereas dividends do not. Ravi should keep evidence of the contract and consider challenging an unfavourable status determination.