Ask the Lawyer @ Silicon.com

Q. As an IT contractor, what is the difference between a contract for services and a contract of service? Also, where do I find more information?

A. Basically, a "contract for services" refers to a "self-employed" or freelance contract. A "contract of service" is a contract of employment.

For the purposes of taxation, the government had proposed putting in a statutory test for the difference between an employee and a self-employed contractor, but was persuaded not to by pressure from contractor groups in the UK. The old case-by-case tests of who is an employee and who is self-employed therefore remain.

If you are self-employed, there are potential tax benefits for you, but you lose a significant part of the employment law protection that is available to employees. Draft guidance on employment status is provided in the Inland Revenue's Employment Status Rules (IR56) which is available at http://www.inlandrevenue.gov.uk . The following is a useful extract:

"If you can answer 'yes' to the following questions, you are probably employed:

* Do you yourself have to work rather than hire someone else to do it for you?
* Can someone tell you at any time what to do or when and how to do it?
* Are you paid by the hour, week or month?
* Can you get overtime pay?
* Do you work set hours, or a given number of hours a week or month?
* Do you work at the premises of the person you work for, or at a place or places he or she decides?

If you can answer 'yes' to the following questions, it will usually mean you are self-employed:

* Do you have a final say in how the business is run?
* Do you risk your own money in the business?
* Are you responsible for meeting the losses as well as taking the profits?
* Do you provide the main items of equipment you need to do your job, not just the small tools which many employees provide for themselves?
* Are you free to hire other people on your own terms to do the work you have taken on? Do you pay them out of your own pocket?
* Do you have to correct unsatisfactory work in your own time and at your own expense?"

Q. What is the best course of action for someone who is contracting as a limited company? I am caught by each of the tests that classify me as an employee rather than an independent consultant.

A. If you are employed directly by your customer through your limited company, and you would answer "yes" to the Inland Revenue's "Are you employed?" questions (see reply to previous question), then you will fall under the provisions of IR35.

If you fall into the IR35 net, you will be liable to Schedule E-taxation and National Insurance in the same way as if you were employed. This significantly reduces the cash benefit of contracting through a limited company.

There is one concession to those contracting through limited companies - expenses (such as travel, pension or professional expenses) can still be set off against tax and there is a provision for additional "intermediary expenses" of five per cent of your turnover.

IR35 and other details can be obtained at http://www.inlandrevenue.gov.uk. Useful information is also available at http://www.contractoruk.co.uk.

Q. We have recently developed an innovative recruitment tool. Since its inception it has aroused interest from blue chips globally. How can we safeguard what we are doing? It has been solely developed inhouse by ourselves, and conceptually is very unique.

A. Intellectual Property is a general term for a group of rights which are wildly different from each other. Each can be a powerful weapon in a business's ability to make money, and some can work together - but a basic understanding of what they are and how they work is essential. People write text books inches-thick on each kind, and law firms like mine have built a business on advising as to their creation, protection and exploitation. So this is going to be a nutshell in a nutshell:

A patent is a deal between you and the government, when it agrees (by checking vast databases of existing records, plus anything else coming to light) that you are the first to think up a clever, useful, product or process. You have to show it to everyone, but in return you get say 20 years to monopolise it. Design rights are similar - but apply to the appearance (aesthetics) of products.

A copyright is a right to stop others copying what you have already spent effort creating - in written, graphic, musical or dramatic form. They can independently create the same thing - the monkey typing Shakespeare could not be sued. Copyright arises automatically.

Trademark rights are the rights you have in any brand which people associate with your goods or services. It helps to register them with the government, but you don't have to. They don't stop others doing what you do - just from pretending they're you when they do it.

Trade secrets are just that - things you know but others don't. As long as they don't you have an advantage. You can license others to use your secrets, if they are substantial and can be recorded. Anyone who agrees not to use your secrets, and then does (or steals them), can be sued.

I can't tell with so little information what options you have, but at first glance: you might have something patentable (though business processes are one of several exceptions), you may have copyright material such as software and workflow drawings (but perhaps these can be easily developed from scratch), you certainly have secrets (though whether you can exploit them without revealing them is another matter), and you can always build market recognition by use of trademarks (but this doesn't stop competition, just cheating). If this is what you plan to build your business on, not taking careful legal advice from an expert would be a false economy and a big mistake. (The man who invented Superman got $100. He probably 'couldn't afford' to take advice.)

** Network Multimedia Television Ltd./Silicon.com give no warranties as to the accuracy of the information and advice contained herein and can take no responsibility for any acts or omissions resulting from reliance upon the information provided. Commentary is intended only as general guidance on legal issues arising from the circumstances described, and specific legal advice based on all relevant facts should always be sought.