If your business relies heavily on self-employed advisers, now might be a good time to start looking at alternative business models
The recent news of ex-rugby player Stuart Barnes, who lost an IR35 battle against HM Revenue & Customs (HMRC), leaving him with a £700,000 tax bill, made me think about the use of self-employed contracts in the adviser sector. In response to the story, former financial planner Dave Robinson wrote on LinkedIn:
“Very interesting. I wonder how many self-employed financial adviser contracts would pass the test on this latest interpretation? And how many self-employed advisers are there? Surely, given the state of the public purse, it can’t be long before HMRC starts having a closer look.”
As an employment lawyer working within financial services, the prevalence of self-employed advisers has always made me feel slightly uncomfortable. It’s a model that is frequently used. Indeed, we regularly draft self-employed adviser agreements, advising on the employment status risks for employment and tax purposes, including IR35. When looking at the test of employment status, self-employed advisers have an uphill struggle from the outset. There is normally a consultancy agreement in place that requires the adviser to provide services personally to a firm in return for remuneration. In an industry built on relationships, it’s unlikely a client would accept any old person turning up to give them advice. It’s unlikely a firm would be happy with this arrangement either.
Control is also a problem. In a regulated industry where a firm’s own compliance with its regulatory obligations depends on its workforce complying with the Financial Conduct Authority’s requirements and its own polices and procedures, the “what, when, where and how” boxes must be ticked. So, with mutuality of obligation, personal service and substitution and control out of the window – what next? Well, it’s not all bad news. The self-employed adviser can normally carry out the work when they like and, because most are pay-away arrangements, there is no set amount of work required or fixed remuneration – you only get paid for work you do.
But despite these factors, it still feels like there could be a bit of a hill to climb. There remains a question that could push the adviser over the self-employed line – is the self-employed adviser in business on their account? In many situations, this is the case. Self-employed advisers who have their own book of business bring it to the firm with them and can take it when they leave. Ownership of clients and a degree of financial risk taken by the self-employed adviser certainly helps with the employment status analysis. However, matters aren’t always this straightforward and the firm may need to have some level of client ownership and protection to sufficiently protect its business.
With this in mind, a firm will need to carefully consider and balance the employment status risk against the risk to its business if it doesn’t have post-termination protections in place, such as restrictive covenants, which would protect its confidential information and client relationships if the self-employed adviser were to leave. All that said, being “in business on your account” didn’t end up helping Barnes, with the Upper Tribunal drilling into other factors such as the right to provide a substitute, exclusivity and lack of financial risk. It feels like only a matter of time until HMRC decides to shift its focus away from the world of sport and media to the financial services sector. If your business relies heavily on self-employed advisers, now might be a good time to start looking at alternative business models.
This article was originally published in Money Marketing, please see here.