Many UK businesses bring in consultants for specialist skills and flexibility. But whether you’re hiring a consultant directly (as an individual) or engaging them through a personal service company (PSC), it’s essential to use a clear consultancy agreement. The right agreement protects both sides, sets expectations, and helps avoid disputes.

1) Direct consultant vs personal service company (PSC)

Hiring an individual directly

The contract is with the person. You must consider whether they are genuinely self-employed or, in reality, a worker or employee based on how the relationship operates day-to-day, not just labels in the contract.

Hiring via a PSC

The contract is with the consultant’s limited company. This changes how tax and employment rules may apply—particularly the off-payroll working rules under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA). For medium and large private-sector clients (and public authorities), the client must assess status and may need to operate PAYE if the engagement is “deemed employment.”

For small private companies, the original IR35 rules (ITEPA, Chapter 8) continue to apply so the PSC remains responsible for the assessment and tax risk.

2) Employment status and practical risk

Regardless of whether you contract with an individual or a PSC, the engagement can be treated as employment if, for example:

  • There is a requirement for personal service (no genuine, unfettered right of substitution).
  • The client exercises significant supervision, direction, or control over how, when and where work is done.
  • There are extensive restrictions on working for others that look like an employment relationship. Can the consultant work for competitors of the client during or after the engagement? Too many restrictions may push them into “employee” status.

Indicators that can support self-employment in a PSC engagement include a deliverables-based scope and a genuine, unfettered right of substitution—though these are only part of the overall picture.

3) Deemed employment and ITEPA (IR35 & off-payroll)

ITEPA contains two key regimes affecting PSC arrangements (for more information on IR35 and the off-payroll rules, check out our article):

  • Chapter 8 (IR35) – applies where services are provided via a PSC to a small private-sector client. Here, the PSC assesses status and accounts for any PAYE/NICs if IR35 applies.
  • Chapter 10 (off-payroll working rules) – applies where services are provided to medium or large private-sector clients (and to public authorities). The client (as fee-payer) must assess status and, if the engagement is deemed employment, operate PAYE and deduct Income Tax and NICs from the fees.

What “deemed employment” means in practice

  • The fee-payer (often the client) deducts Income Tax and employee NICs via PAYE from the PSC’s invoice if the role is deemed employment under Chapter 10.
  • The fee-payer is also responsible for employer’s NICs and, where applicable, the Apprenticeship Levy.
  • Contracts commonly include tax warranties and indemnities (with appropriate carve-outs) to manage HMRC challenge risk; ensure the agreement allows PAYE deductions if Chapter 10 could apply.
  • For self-employed consultants (direct individuals, not through a PSC) even if you call the person a “consultant,” if the working relationship looks like employment (set hours, direct control, ongoing work), they may be legally treated as an employee. This affects rights such as holiday pay, sick leave, and redundancy – and also how tax is handled. Deemed employment can make the relationship between client and consultant much more expensive and complex. For more information on upcoming employment rights for employees, see our article Labour’s Employment Law Reforms, Summarised.

Example: A PSC supplies a consultant who works fixed hours under a manager’s direction and has no genuine right to substitute. Even though the contract is with a company, the client may need to run PAYE and NICs as if the consultant were an employee for tax purposes (deemed employment).

4) Key terms to include in your consultancy agreement

Parties and basics

  • Names and addresses of the parties; company numbers where relevant.
  • Start date, duration, and notice periods.
  • For PSCs, consider a side letter to take direct undertakings from the individual (e.g., confidentiality, IP assignment, restrictions).

Duties and deliverables

  • Clear scope of services, deliverables and milestones; reporting lines and locations.
  • Who fixes defects/remedial work and at whose cost.
  • Substitution: set any vetting rights; obtain direct confidentiality undertakings from substitutes if required; note status/tax implications of restricted substitution.

Fees, VAT and expenses

  • Rate structure (hourly/daily/fixed-fee per deliverable), invoice timing, payment terms, and VAT.
  • Expense rules (pre-approval, caps, or “reasonably incurred”).
  • If Chapter 10 might apply, reserve the right to deduct PAYE/NICs and ensure you can obtain necessary information to account for tax correctly.
  • If the consultant (or PSC) uses a substitute, they should typically be directly responsible to the substitute for their remuneration.

Confidentiality and post-termination restrictions

  • Protect confidential information during and after the engagement; obtain direct undertakings from the individual via a side letter if using a PSC.
  • Consider proportionate restrictive covenants (e.g., non-solicitation). Be aware these can affect status analysis.

Data protection (UK GDPR)

  • Confirm whether personal data will be processed and require appropriate technical/organisational measures, like a data processing agreement. We can help with this as well.
  • Check suitable insurance for data-related liabilities.

Intellectual property (IP)

  • Ensure IP assignment for all deliverables. With PSCs, take assignment from the company and, where needed, a personal assignment from the individual via side letter; extend to substitutes.

Insurance, liability and indemnities

  • Specify required policies (e.g., professional indemnity, public liability) and limits.
  • Agree fair indemnity wording for losses arising from services.

Termination and handover

  • Return of client property and secure deletion of business data at the end of the engagement (apply to the PSC and the individual).

5) Extra legal points for PSC engagements

  • Managed Service Companies: if the PSC is a managed service company, the client and its directors can become liable for unpaid PAYE/NICs. Carry out due diligence.
  • Commercial Agents Regulations 1993: if the PSC or individual has ongoing authority to negotiate/ conclude the sale or purchase of goods, special rights may arise and commercial terms may need rethinking.

Final thoughts: The type of engagement—direct individual or PSC—changes the legal and tax analysis. A well-drafted consultancy agreement that addresses status, ITEPA/IR35 risk, confidentiality, IP, data protection and termination will protect your business and reduce the chance of disputes.

This guide is general information, not legal advice. Get tailored advice for your specific circumstances.

Published by Fergus Thompson