Contractors' Questions: How to freelance for my employer?

Contractor's Question: I have been working at a consultancy for many years, but over the last 12 months have become increasingly despondent with the outfit due to a lack of training and promotional opportunities. I have been working on a project for the last three years and am based in the client's offices. I have very little contact with my employer.

Other staff at the consultancy have become self-employed, allowing them to work on projects as an 'independent consultant' for clients which the consultancy secures. These independents get to carry on working for clients and appear to be on the same projects they always have been on. But as an independent, via the consultancy's contract with the client, they [appear to] do exactly the same job as me but get paid a lot more.

Of course there is a risk of me damaging the relations I have developed with both parties, but is there anything preventing me from becoming an independent contractor for the consultancy I work for? As far as I'm aware there is nothing in my contract, but would IR35 be a potential obstacle? How is it best to go about becoming an independent contractor at an IT consultancy from a position of permanent, full-time employment?

Expert's Answer: Firstly; it is advisable to have an expert review your contract to ensure that there are no clauses covering such a situation, directly or indirectly. Any termination clauses, or loyalty/ non-compete, and/or exclusivity clauses may be of concern, as they could hamstring you later if things do not go according to your plan.

IR35 effects situations where you are paid by an intermediary who is paid by the client. HM Revenue & Customs introduced the legislation for situations where the intermediary is a limited company owned by you and you pay yourself in dividends. People do this for many reasons, including the limited liability the route offers. But the IR35 aspect is a tax issue, as corporation tax rates and dividend tax rates are lower than income tax rates. In the eyes of HMRC, contractors were using private limited companies as a screen to pay a lower level of tax. If you go down the route of a private limited company with the current end-user in mind, then you should get professional advice in order to side step the ramifications of IR35.

Other than peruse these recommendations, what can you do now? It may be wise to find out quietly whether the client is interested in contracting you directly, without the backup of your current employer, and therefore without the attendant insurance, replacement personnel and prestige benefits. You also need to sound them out to see if it is you they are currently contracting or the company you work for, i.e. are you replaceable?

In the event that you are indispensable to the job, you are in a better position to deal with your employer and negotiate, either for better employment terms or a contract restructuring such as you mention above.

Of course it may also be worth having a quiet confidential word with others at your employer. Often an employer would be happy to get you off their books, thereby losing their obligations to you, but keep you available for work i.e. take you on as a contractor themselves. I can only advise that you must be sure you will find other avenues of work should they choose to stop sending it your way, and/or you/they lose the client.

In your circumstances, it may be preferable to agree employment terms with the client direct. You must remember before you take action, that although employers have their bad points, when a job is over, an employer should provide you with another, whereas if you are self-employed, only you can do so.

The expert was Ben Evans, of the internet and e-commerce team at Lawdit Solicitors.

Wednesday 17th Feb 2010
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