How to Draft a Consultancy Agreement Under English Law

You can draft a consultancy agreement for a UK company by capturing seven things clearly: who the parties are, what the consultant will deliver, how they are paid, who owns the resulting intellectual property, what stays confidential, whether the person is genuinely self-employed rather than an employee, and how either side ends the arrangement. Get those seven right, in plain language, and you have a workable agreement. Get the status and IP points wrong and you inherit tax liability and disputed ownership of work you thought you paid for.

An AI drafting tool can produce a first draft of all seven in minutes, and it will get the mechanical clauses close. What it cannot do for you is decide the facts: whether this consultant is really independent, whether you need a substitution right, whether the work triggers IR35. This guide walks through the clauses that matter, the decisions behind each one, and the IR35 question every UK business eventually asks.

What a consultancy agreement actually is

A consultancy agreement is a contract for services between your business and an independent supplier of expertise. That supplier might be a sole trader, a partnership, or more commonly a personal service company (a limited company through which one individual works). The defining feature is that the consultant is not your employee. They run their own business, carry their own risk, and are responsible for their own tax and National Insurance.

That distinction is the whole point. It is why the agreement exists, why HMRC scrutinises it, and why the wording you choose has consequences well beyond the four corners of the document. Everything that follows flows from getting the status right.

Consultant versus employee: the status test that drives everything

English law does not decide employment status by the label on the contract. A tribunal or HMRC will look at what actually happens in practice and can override your paperwork if reality contradicts it. But the paperwork still matters, because it sets the expectations that shape the reality.

Three factors do most of the work when courts assess status:

1. Personal service. Must this specific individual do the work, or can they send a substitute? A genuine right of substitution points strongly towards self-employment. An obligation to turn up in person points towards employment.
2. Mutuality of obligation. Is your business obliged to offer work and is the consultant obliged to accept it? While a basic or an "irreducible minimum" of mutuality exists in any contract, an ongoing obligation on both sides strongly favours employment. A consultant who takes discrete projects and can decline them looks self-employed.
3. Control. Do you direct how, when and where the work is done, with sufficient managerial supervision, as you would with staff? Or does the consultant decide their own methods and hours to deliver an agreed outcome without being subject to workplace regulations and supervision? High control points to employment.

Secondary factors also count: who provides the equipment, whether the consultant takes financial risk, whether they work for other clients, whether they are integrated into your organisation (a desk, a job title, a line manager). No single factor is decisive. A tribunal weighs the whole picture.

Here is the practical comparison that in-house teams find most useful when reviewing a draft:

Feature	Points towards genuine consultant	Points towards employee
Who does the work	Right to send a qualified substitute	Must perform personally
Obligation to accept work	Free to decline projects	Expected to accept work offered
Control over method	Consultant decides how to deliver	Business directs day to day tasks
Working hours	Consultant sets own schedule	Fixed hours set by business
Equipment	Uses own tools and kit	Business provides everything
Financial risk	Fixed price, can profit or lose	Paid regardless of outcome
Other clients	Works for several businesses	Works only for you
Benefits	No holiday, sick pay or pension	Employment benefits provided

The lesson for drafting: your consultancy agreement should reflect the right-hand column nowhere and the left-hand column everywhere. If you find yourself wanting fixed hours, personal performance and full control, you may actually need an employment contract, and pretending otherwise creates liability rather than removing it.

The seven clauses that carry the weight

Most consultancy agreements run to a familiar set of provisions. These seven are where the real risk sits, and where a generic template most often falls short of your actual situation.

1. Services and deliverables

Describe what the consultant will do with enough precision that both sides know when it is done. Vague scope ("provide marketing consultancy as required") is the single most common source of disputes, because it lets each side assume a different bargain. Prefer:

• A defined statement of work or schedule listing specific deliverables
• Milestones or acceptance criteria where output can be measured
• A clear statement that the consultant delivers an outcome, not their time, wherever the commercial reality allows

Framing the engagement around outcomes rather than hours also supports the self-employed status you are relying on.

2. Fees and payment terms

Set out the fee, whether it is fixed, daily or hourly, what expenses are recoverable, and the invoicing rhythm. Be explicit about:

• The rate and the basis (per project, per day, per deliverable)
• How and when invoices are submitted and the payment period, for example 30 days from a valid invoice
• That the fee is exclusive of VAT, which the consultant charges if registered
• That the consultant is responsible for their own income tax and National Insurance, and indemnifies you if HMRC later disagrees (a tax indemnity)

The tax indemnity is worth insisting on. It does not stop HMRC coming to you first, but it gives you a contractual route to recover from the consultant if the arrangement is reclassified.

3. Intellectual property assignment

This is the clause businesses most often get wrong, and the mistake is expensive. Under English law, when an independent contractor creates work, the contractor generally owns the copyright and other IP by default, not the business paying for it. This is the opposite of the position for employees, where IP created in the course of employment usually belongs to the employer automatically.

So if you want to own what you pay a consultant to produce, the agreement must say so expressly. A robust IP clause should:

1. Assign all IP in the deliverables to your business, present and future, so ownership transfers rather than merely being licensed
2. Include a waiver of moral rights, so the consultant cannot object to how you use or alter the work
3. Contain a further assurance obligation, requiring the consultant to sign any additional documents needed to perfect your title later
4. Address pre-existing IP: if the consultant brings their own tools, code or templates, you take a licence to those rather than ownership

Without an express assignment you may end up with a licence you did not negotiate, or a fight over whether you can use software, designs or content you believed you owned outright. For work that becomes a core asset, this clause is not boilerplate. It is the deal.

4. Confidentiality

Consultants see inside your business: pricing, customers, strategy, technical know-how. A confidentiality clause should define confidential information broadly, restrict its use to the purpose of the engagement, and survive termination for a defined period or indefinitely for trade secrets. Include carve-outs for information that is already public, independently known, or required to be disclosed by law.

Where the consultant will handle personal data, add data protection wording that reflects UK GDPR, and decide whether they are acting as a processor on your behalf, which triggers specific contractual requirements.

5. Substitution

A genuine right for the consultant to provide a suitably qualified substitute is one of the strongest indicators of self-employed status. But it has to be real. A substitution clause hedged with so many conditions that no substitute could ever actually be sent will be seen through by HMRC.

If you genuinely need this individual and no one else, be honest about it, and shore up the other status factors instead. If you are content for the consultant to delegate, say so plainly and let it operate in practice.

6. Termination

Set out how the arrangement ends. Typical mechanisms:

• Notice: either party may terminate on a defined period of written notice
• Termination for cause: immediate termination for material breach, insolvency, or serious misconduct
• Consequences: payment for work done up to termination, return of property and confidential information, survival of IP and confidentiality clauses

Be careful that generous notice periods, guaranteed minimum engagements or a long fixed term do not start to look like the security of employment. Short notice and project-based engagement support the consultancy characterisation.

7. Status and independence declarations

Include express statements that the consultant is an independent contractor, is not entitled to employee benefits, is responsible for their own tax, and is not authorised to bind your business except as expressly agreed. These declarations do not by themselves determine status, but they document the intended relationship and support your position if it is ever questioned.

The IR35 question UK companies actually ask

IR35, formally the off-payroll working rules, is the point where most in-house teams get nervous, and rightly so. Here is what it means in practice.

IR35 applies where a worker provides their services through an intermediary, usually their own personal service company, but would be treated as your employee if you engaged them directly. In that situation HMRC takes the view that employment taxes should be paid, regardless of the consultancy label. The rules exist to catch "disguised employment".

The critical question for a UK business is who is responsible for assessing status and paying any tax. The answer depends on your size:

Your situation	Who assesses IR35 status	Who bears the tax risk
Consultant works through their own limited company, and you are a medium or large business	Your business (the client)	Your business, or the fee payer in the chain
Consultant works through their own limited company, and you meet the small company exemption	The consultant's own company	The consultant's company
Consultant is a genuine sole trader (no intermediary)	Ordinary status tests apply, not the off-payroll rules	Depends on employment status assessment

For most mid-market and larger businesses, the responsibility to assess whether a contractor falls inside or outside IR35 sits with you, the client. If a contractor is "inside IR35", you or the fee payer must deduct income tax and National Insurance through payroll, even though the person is not your employee in the ordinary sense.

Practical steps to manage IR35 sensibly:

1. Assess each engagement on its facts before it starts. Substitution, control and mutuality of obligation drive the outcome cumulatively, exactly as with general employment status.
2. Issue a Status Determination Statement where the off-payroll rules apply to you, setting out your conclusion and the reasons, and give it to the consultant and anyone else in the contractual chain.
3. Keep the contract and the working reality aligned. An "outside IR35" contract that describes an employee in all but name will not protect you. HMRC looks at practice.
4. Take reasonable care. Blanket determinations that treat every contractor as inside IR35 without individual assessment can themselves be challenged.

The point that trips businesses up: a well-drafted consultancy agreement supports an "outside IR35" position, but it does not create one. You cannot draft your way out of a relationship that is employment in substance. Where the money or the population of contractors is significant, take specialist tax advice on the determination rather than relying on the contract alone.

How AI drafting fits into this, and where it stops

An AI contract tool is genuinely good at the mechanical layer of a consultancy agreement. Give it the parties, the fee, the notice period and the nature of the work, and it will assemble a coherent draft with proper IP assignment, confidentiality, tax indemnity and termination provisions. It will also flag where a clause is missing or where two provisions contradict each other, which is where human drafts quietly fail.

What AI does not do is make the judgement calls. It cannot know whether your consultant genuinely works for other clients, whether the substitution right is real, or whether the day to day working pattern will match the paper. Those are facts about your business, and they decide status and IR35. The right model is AI for the draft and the review, and an informed human, sometimes a lawyer or tax adviser, for the judgement.

This is where a platform designed for the work a business does on its own contracts earns its place. GenieAI can draft a consultancy agreement from your own template or a standard form, applying your preferred positions on IP, confidentiality and termination consistently across every engagement. Because the same tool can also review and mark up a consultant's own paper when they send their terms back, your position stays consistent whether you are the one drafting or the one responding.

For teams whose contracting sits inside Microsoft Word, working through a Word add-in means the drafting and review happen where the document already lives, without exporting into a separate system. And because consultancy agreements carry confidential and often personal data, it matters that the platform is built for that: GenieAI is certified to ISO/IEC 27001:2022, and you can read how it handles data security before you put anything sensitive through it.

Sector notes: consultancy risk is not the same everywhere

The seven clauses are constant, but the risk weighting shifts by industry. A few examples in-house teams will recognise:

• Technology. IP assignment is the whole game. If a contractor develops code, designs or product IP, an incomplete assignment can undermine the value of the asset itself. Teams in technology businesses should treat the IP clause as non-negotiable and address pre-existing IP explicitly.
• Construction and engineering. Consultants often sit alongside a web of subcontractors and collateral warranties. Scope, professional indemnity insurance and liability caps carry more weight. Businesses in construction should align the consultancy agreement with the wider project documents.
• Energy and resources. Long project cycles and high-value technical advice mean confidentiality, liability and termination for convenience deserve close attention in the energy sector.

A drafting checklist you can work through

Before you sign off a consultancy agreement, confirm you can answer yes to each of these:

1. Does the scope describe deliverables specifically enough that both sides know when the work is complete?
2. Is the fee, VAT position, expenses policy and payment period clearly stated?
3. Does the consultant carry their own tax responsibility, backed by a tax indemnity?
4. Is all IP in the deliverables expressly assigned to your business, with moral rights waived and further assurance included?
5. Is pre-existing IP dealt with by licence rather than left ambiguous?
6. Is confidential information defined broadly and protected beyond termination?
7. Does the substitution right, if included, reflect what will actually happen?
8. Are notice periods and termination rights short and project-based enough to support self-employed status?
9. Have you assessed IR35 on the facts, and issued a Status Determination Statement if the off-payroll rules apply to you?
10. Does the working reality match the contract, or are you papering over an employment relationship?

Work through that list and you will have caught the failures that generic templates leave open. The clauses are the easy part. The discipline is in matching the words to what your business will actually do.

For teams that engage consultants regularly, the value is in consistency: the same IP position, the same tax indemnity, the same termination logic on every agreement, so nothing slips through because one contract was drafted in a hurry. That consistency is what turns contract drafting from a source of hidden liability into a controlled process, and it is where giving your commercial and legal teams the right tooling pays back most clearly.

Frequently asked questions

Can I use an AI tool to draft a consultancy agreement for a UK company?

Yes. AI tools can produce a solid first draft of a UK consultancy agreement covering services, fees, IP assignment, confidentiality, substitution and termination, and can review a consultant's own terms when they send theirs back. What AI cannot decide for you is the factual questions that determine employment status and IR35, such as whether the consultant genuinely works independently. Use AI for the draft and review, and human judgement for the status assessment.

Who owns the intellectual property a consultant creates under English law?

By default, an independent consultant owns the intellectual property they create, not the business paying for it. This is the opposite of the position for employees. To own what you pay for, your consultancy agreement must expressly assign the IP to your business, ideally with a waiver of moral rights and a further assurance obligation. Without an express assignment you may only have a licence, or face a dispute over ownership.

What is IR35 and does it apply to my business?

IR35, or the off-payroll working rules, applies where someone provides services through their own limited company but would be treated as your employee if engaged directly. For medium and large businesses, the responsibility to assess status and account for any employment taxes generally sits with the client, not the contractor. Businesses meeting the small company exemption pass that responsibility to the consultant's own company. Assess each engagement on its facts.

Does a consultancy agreement stop someone being classed as an employee?

No. Employment status under English law is determined by the reality of the working relationship, not the label on the contract. A tribunal or HMRC can look past your paperwork if the day to day arrangement looks like employment, considering personal service, mutuality of obligation and control. A well-drafted agreement supports genuine consultant status, but it cannot convert an employment relationship into a consultancy.

What payment terms should a consultancy agreement include?

State the fee and its basis (fixed, daily or hourly), what expenses are recoverable, and the invoicing and payment cycle, such as 30 days from a valid invoice. Make clear the fee is exclusive of VAT, and that the consultant is responsible for their own income tax and National Insurance. A tax indemnity, requiring the consultant to reimburse you if HMRC reclassifies the arrangement, is a sensible protection to include.

What is a substitution clause and why does it matter?

A substitution clause gives the consultant the right to send a suitably qualified substitute to perform the work instead of doing it personally. A genuine right of substitution is one of the strongest indicators that someone is self-employed rather than an employee. It only helps if it is real, so avoid conditions so restrictive that no substitute could ever actually be sent, because HMRC and tribunals will see through a sham right.

How do I terminate a consultancy agreement?

Terminate according to the mechanism in the contract, typically by giving the agreed period of written notice, or immediately for material breach, insolvency or serious misconduct. On termination, the consultant is usually paid for work done up to that point, must return your property and confidential information, and the IP and confidentiality clauses continue to apply. Keep notice periods short and project-based to support genuine self-employed status.

Do I need a lawyer to draft a consultancy agreement?

Not always. For a straightforward engagement using well-drafted terms, a business can produce and review the agreement itself, particularly with AI tooling that applies consistent positions on IP, confidentiality and termination. Take specialist legal or tax advice where the IP is a core business asset, where significant sums or many contractors are involved, or where the IR35 position is genuinely uncertain, because those are the situations where getting it wrong is most costly.