Labelling someone a 'consultant' won't work, if in fact they are behaving and being treated like an employee.
If the tax authorities or an employment tribunal decide that the 'consultant' is really your employee, they will ignore the label and treat the consultant like an employee and you may lose any advantages. This can include having to pay tax payable under a normal employment relationship.
To avoid this situation, you need to be very careful about what's in the consultancy agreement, particularly around issues such as how much work you have to provide, how much you control/supervise the provision of the services, the length of the appointment, whether the consultant is integrated into your workforce and if the consultant can work for anyone else. Consider using Rocket Lawyer's Consultancy agreement to help ensure you keep to the rules.
You also need to be particularly careful about confidentiality and intellectual property created by the consultant. Once again, consider using Rocket Lawyer's consultancy agreement to help ensure you stay legally safe.
You should be especially aware of the IR35 tax law and the changes from 6 April 2021.
IR35 was introduced to tackle tax avoidance by consultants supplying their services to clients via an 'intermediary' (ie a party who makes arrangements for or pays an individual for providing services to the client) who would otherwise be an employee.
From 6 April 2021, all public authorities (ie third sector organisations, such as some charities) and medium and large-sized clients will be responsible for deciding the employment status of consultants. This means that the responsibility for deciding consultants’ employment statuses (and statuses for tax purposes) will therefore shift from the consultant to the client. If this tax status is incorrect, the client will be responsible for any fees and penalties, making it very important to get it right.
For more information, read IR35.