Should the Seller of a Business Stay on as a Consultant or Employee After Completion?

When buying a business, it’s common for the seller to stay involved in some capacity after completion. This might be to ensure a smooth handover, maintain customer relationships, or simply to keep the wheels turning while the new owners find their feet.

However, a practical question often arises: Should the seller stay on as a consultant or become a PAYE employee?

It might seem like a technicality, but getting this wrong can be costly. It raises several legal, tax and HR issues, including potential liabilities under the infamous IR35 rules. In this article, I’ll take you through the key considerations, including how the courts have approached similar issues, and explain why sometimes the simplest option – a fixed-term employment contract – might be the safest route.

 

Why Might a Seller Stay Involved After Selling Their Business?

There are lots of reasons a seller might remain post-sale:

• To assist with the transition, handing over key relationships or internal knowledge
• To meet contractual obligations under the share purchase agreement (SPA), particularly where deferred consideration or earn-outs are involved
• To maintain continuity for staff and customers
• To provide consultancy or advisory services that add value in the short-term

So, the desire to keep them on board makes sense. The question is how you structure that involvement.

There are three main ways to do it:

1. Employ the seller as an employee (often on a fixed-term basis)
2. Engage them as a consultant (either personally or through their own service company)
3. Have an informal handover period written into the Share Purchase Agreement (SPA), with no further contract

Each option has pros and cons – and choosing the wrong one can lead to tax problems, employment disputes, or confusion about roles.

But first, what is IR35 and why does it matter?

IR35 is shorthand for a set of tax rules designed to catch so-called “disguised employment”. It’s also known as off-payroll working.

The idea is simple. If someone is working like an employee, they should be taxed like one – even if they’re invoicing through a limited company.

When IR35 applies, the company receiving the services (i.e. the buyer) may become liable for income tax and NICs, as if the seller were on payroll. This can come as a nasty shock if HMRC investigates.The ’employee’ may also have to pay tax as well.

The key test under IR35 is whether, if the intermediary (usually the PSC) were removed, there would be an employment relationship between the individual and the client.

It’s not about what the contract says – it’s about what actually happens day to day.

What Do Courts Look at When Deciding If IR35 Applies?

Several factors are taken into account. Three stand out:

1. Control – Does the client (i.e. the buyer) control how, when and where the seller works?

If the seller is told what hours to work, is expected to report to someone, or must work on-site using company equipment, that suggests employment.

If the seller decides when to work, what to charge, how to do things, then it suggests consultancy.

2. Mutuality of Obligation – Is the company obliged to offer work, and is the seller obliged to do it?

In a typical employment relationship, the answer to both is yes. In a consultancy arrangement, the idea is there’s more flexibility on both sides; there could be work there might not be.

One key to this is: is the person getting a fixed payment come what may, or are they getting paid for work actually done? That isnt a panacea, but is a good guide to the question.

3. Personal Service and Substitution – Can the seller send someone else to do the work, or must they do it personally?

If personal service is required, that points towards employment. A genuine consultant should be able to send a substitute, even if that rarely happens in practice.

Option 1 – Fixed-Term Employment Contracts

A common and generally safe option is to employ the seller on a fixed-term basis after completion. This is particularly appropriate where the seller will continue in an operational or management role and be integrated into the day-to-day business. In this arrangement, the seller is placed on payroll and taxed under PAYE in the usual way.

If the seller was previously employed by the target company, that employment must be formally terminated at completion. This is usually done through a settlement agreement, which terminates their employment and waives any claims they may have. The buyer (or the acquiring company, depending on the structure) then issues a fresh employment contract, usually with a fixed term of several months to a year.

The key advantage of this approach is its clarity. It avoids any IR35 concerns and places the relationship squarely within employment law. The seller will have clear duties, working hours, and accountability. It also gives the buyer full control, including the ability to supervise, direct and, if needed, terminate the arrangement under the terms of the contract.

However, there are some downsides. The seller might find it uncomfortable to be an employee of their former business, particularly if reporting to someone they previously employed. From the buyer’s perspective, additional responsibilities may include payroll, pension contributions, and dealing with holiday and sickness absence. Despite these issues, fixed-term employment remains the most robust option where the seller is expected to have a continuing role in the business.

In summary, fixed-term employment is well suited to situations where the seller will:

• be involved in operational matters on a daily basis
• work set hours, either full-time or part-time
• be supervised or managed by others in the business
• use the buyer’s premises, tools, or systems

Pros:

• Clear legal and tax position
• No IR35 risk
• Employer retains full control

Cons:

• More formal and less flexible
• Potential awkwardness (seller becomes employee of their former business)
• You take on full employment obligations

Option 2 – Consultancy Arrangements

Another common route is to retain the seller as a consultant, usually through their own limited company. This can appear attractive because it allows flexibility, avoids employment formalities, and may offer the seller a more tax-efficient arrangement.

However, this option carries the risk of falling foul of the IR35 rules. IR35 is tax legislation aimed at stopping so-called “disguised employment” – situations where someone works like an employee but is engaged via a personal service company to avoid PAYE and National Insurance.

Since changes were introduced in April 2021, the party receiving the services – in this case, the company/buyer – has been responsible for determining whether IR35 applies. If HMRC later decides that the seller was really working as an employee, the buyer may be liable for all unpaid income tax and National Insurance, plus interest and penalties.

IR35 is notoriously fact-sensitive. The written contract is only one part of the picture. What matters is how the relationship works in practice. If the seller is told when and where to work, cannot send a substitute, and becomes embedded in the business, then IR35 is likely to apply.

The courts and tribunals have considered numerous IR35 and employment status cases in recent years. In Kickabout Productions Ltd v HMRC [2020], a radio presenter working through a personal service company was found to be inside IR35. He had regular working hours, was expected to follow instructions, and was considered to be part of the wider team. In HMRC v Atholl House Productions Ltd [2022], the Court of Appeal confirmed that even where the contract says one thing, the working relationship’s reality matters. In Pimlico Plumbers v Smith [2018],  a plumber was found to be a worker (not fully self-employed) because he was closely controlled.

The consultancy route is most appropriate where the seller will have an arms-length advisory role post-completion. They should not be involved in routine management, should retain control over how and when they work, and should ideally have the right to send a substitute (even if they never actually do).

A well-drafted consultancy agreement is essential. It should avoid language suggesting control, supervision or integration. It should also include indemnities to protect the buyer from any tax liability that might arise if IR35 is found to apply.

Consultancy may be suitable if the seller will:

• provide advice or input on strategy, but not be involved in day-to-day matters
• work flexibly or on an ad hoc basis
• be based remotely, without needing to attend regularly
• not be integrated into the team or managed like other staff

However, the risks should not be underestimated. If in doubt, the safer route is to treat the seller as an employee.

Pros:

• Flexible and commercial
• Can be more tax-efficient (for the seller)
• No full employment rights or obligations

Cons:

• IR35 risk for the buyer
• Lack of control if properly structured
• HMRC scrutiny if things are unclear

If you go down the consultancy route, get a properly drafted consultancy agreement. Avoid language that sounds like employment. Include a right of substitution and make sure the seller is responsible for their own tax. Also, consider running the arrangement through HMRC’s CEST tool to get an initial assessment of the IR35 position.

Option 3 – Informal Handover Period via the SPA

The third option is to deal with the handover informally, usually by including a provision in the share purchase agreement that the seller will assist the buyer for a short period following completion.

This kind of clause typically states that the seller will be available for a certain number of days or on a reasonable basis to help the buyer with the transition. No employment or consultancy contract is entered into, and no specific payment is made beyond what has been agreed under the SPA.

This informal handover can work well where the seller’s involvement is minimal. For instance, they might be needed to answer a few questions, point out key suppliers, or explain internal processes. As long as this help is short-term and limited in scope, little risk is involved.

However, problems arise if the seller starts to act more actively or continuously. If the buyer begins relying on them for operational decisions or expects regular input, the relationship might start to resemble employment or consultancy. In those cases, the lack of a formal contract can backfire, leading to uncertainty, legal exposure, or even accidental creation of employment rights.

This approach is best reserved for low-risk situations where:

• the seller will only be involved briefly
• there is no ongoing need for services or support
• the parties are confident that the handover won’t evolve into something more substantial

If there is any doubt, it’s safer to formalise the relationship through either employment or consultancy terms.

Choosing the Right Option

There is no one-size-fits-all answer. The right structure depends on what the seller will actually be doing after completion, how much involvement is needed, and how long that involvement is expected to last. It also depends on the buyer’s risk appetite, particularly in relation to tax and employment exposure.

In broad terms:

• A fixed-term employment contract is the safest and clearest route where the seller will have a significant and ongoing role in the business.
• A consultancy arrangement may work where the role is genuinely advisory and non-integrated, but only if IR35 risks are carefully considered and the arrangement is properly documented.
• An informal handover period, recorded in the SPA, is appropriate where minimal involvement is needed and the parties want to keep things light and informal.

Where the seller is already an employee of the target company, that employment must be brought to an end, usually via a settlement agreement, before any new arrangement is put in place.

Option	Best For	Tax Position	Legal Risk	Formality
Employment (Fixed-Term)	Operational roles, ongoing involvement	PAYE – clear	Low	High
Consultant	Strategic or advisory roles	IR35 risk unless structured carefully	Medium to high	Medium
Informal Handover	Limited transition help	Usually covered in SPA	Medium (if help expands)	Low

 

Final Thoughts

Sellers staying on after a business sale can add huge value. But it’s important to structure it correctly from the start.

If they’re truly just doing a short handover, the SPA can deal with that. If they’ll be giving advice but not integrated into the team, consultancy might work – but take IR35 seriously. And if they’re going to be in the thick of it, best to bite the bullet and hire them, at least for a fixed period.

Whatever you do, make sure it matches the commercial reality – because HMRC and employment tribunals certainly will.

If you need help drafting the right agreement or reviewing how a seller’s post-completion involvement should be structured, I’d be happy to assist.

If you are unsure how best to structure a seller’s ongoing involvement, or need help drafting or reviewing the relevant agreements, feel free to get in touch.