Are consultancy arrangements a solution to the Off-Payroll / IR35 rules?

The private sector off-payroll rules, introduced in April 2021, led to much discussion about the use of consultancies as a potential workaround.

What people are talking about here is grouping together to provide services to end hirers so that they can, where appropriate, continue to benefit from the tax efficiency of contracting through a limited company.

Whilst genuine consultancy arrangements are worth considering, they don’t guarantee contractors are necessarily working outside IR35. There are lots of considerations.

Article background and update

This article was originally written by Chris James (Director of Accounting Services, JSA Group) around the introduction of the private sector off-payroll rules in April 2021.

It has been lightly updated for 2025 by the ITContracting team to reflect how HMRC and the market now treat consultancy and contracted-out services models in practice, while keeping the original wording and structure wherever possible.

In this article, Chris James examines what a consultancy is, in this context, and how it would work.

What defines a consultancy?

A genuine consultancy will usually:

• Provide an overall price for the entire project.
• Choose who and how many workers are involved in the project.
• Have more financial control, able to make a loss or an increased profit on the project.

It’s important that consultancy arrangements are not contrived for tax reasons.

In a genuine consultancy, the original end user should interact only with the consultancy’s business workers when operationally necessary, via milestone and scoping meetings, etc.

Tax liability

Who carries IR35 responsibility?

Under the off-payroll rules, responsibility for IR35 assessment and, potentially, liability for unpaid tax, rests with the end hirer where the end hirer is a medium or large organisation (and the engagement is in scope).

Consultancies as the end user

If a consultancy arrangement is used, the consultancy, as the supplier of contracted-out services, becomes the new end user for the purposes of the off-payroll rules and carries the obligations and risk in relation to the workers it engages.

In practice, where there is a genuinely contracted-out service, the organisation receiving the contracted-out services is not treated as the end user in relation to the individual workers supplied by the consultancy.

That is why consultancies have been discussed widely in the contractor community since the reforms.

Small consultancies and the off-payroll rules

Also, because the off-payroll rules apply only to medium and large businesses, they may not apply to genuine small consultancies.

However, size should not be treated as a shortcut.

Where arrangements are structured purely to achieve a small company outcome, HMRC will look closely at the underlying facts and any connected or group arrangements.

HMRC guidance and current position

HMRC guidance on contracted-out services and labour supply has been updated since 2021 and is clearer than it was when this article was first written.

The basic position has not changed: simply calling something a ‘consultancy’ or using a ‘statement of work’ label does not make it a contracted-out service.

The reality of who controls the work, who carries the delivery risk, and how the end client interacts with the individuals still matters most.

Some end users will continue to ban PSCs, or look instead to the expensive comfort of the very biggest ‘consultancy’ firms. Supply chains do adapt over time, but long-term change has already hit the sector.

Clarity on Statement of Work (SOW)

Consultancy services vs SOW arrangements

There’s lots of confusion about consultancy services in relation to Statement of Work offerings. Strictly speaking, consultancy services should not be confused with or merged with statement of work (‘SOW’) offerings.

A genuine consultancy arrangement does change the identity of the end user.

A genuine SOW arrangement is more likely to describe work that is a ‘whole project’ and therefore potentially a consultancy service, or at the contractor level, less likely to be describing disguised employment (so more likely to be ‘safe’ for IR35).

However, if these arrangements are contrived, the protection sought will disappear.

Reducing risk

Working practices and control

If consultancies are to be considered a viable option, then working practices need to be revisited, and contracts will often need to be redrafted.

Also, the organisation receiving the supply of consultancy services must be careful not to return to old ways and to avoid taking control of the consultancy workers on site.

Inside and outside IR35 within consultancies

It’s worth remembering that a consultancy business, delivering a whole service, doesn’t automatically deliver that project using exclusively ‘outside IR35’ workers.

A consultancy business will often have a mix of permanent employees and subject-matter expert freelancers, who are used occasionally and are more likely to be outside.

A consultancy supply, or an SOW assignment, doesn’t guarantee ‘outside’ IR35 status for contractors.

In summary

In summary, in the right situation, the consultancy solution can certainly offer benefits to end users, recruitment businesses, and contractors. But like so much around the off-payroll legislation, it’s very easy to get it wrong.

Further Reading on contracted-out services

• ESM10010: Contracted-out services – HMRC Employment Status Manual – explains how genuine contracted-out services affect who is considered the ‘client’ under the off-payroll rules.
• Help to Comply – Contracted-out services (Part 7) – guidance on legitimate contracted-out arrangements and warnings about contrived setups.