The forthcoming (April 2021) off-payroll rules in the private sector have 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 continue to benefit, where appropriate, 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. In this article, Chris James examines what is a consultancy, in this context, and how would it work? Chris is Director of Accounting Services, JSA Group, and Chairman of the FCSA.
What defines a consultancy?
A genuine consultancy will usually:
- Have an overall price for the provision of the whole 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 only interact with the consultancy business workers where operationally necessary, via milestone and scoping meetings etc.
Under the new IR35 rules, responsibility for IR35 assessment and, potentially, liability for unpaid tax, rests with the end hirer.
If a consultancy arrangement was used, the consultancy, as the supplier of contracted-out services, becomes the new end-user and carries the tax liability. This is why the use of consultancies has been talked about in the contractor community so much of late.
In practice, the organisation receiving the contracted out services (the end hirer) is no longer classed as the end user, so would not carry liability, should the supply chain later fail, and HMRC show that there is additional tax to pay under the rules.
Also, because the new rules apply only to medium and large businesses, they may not apply to genuine consultancies which are small.
However, HMRC guidance relating to ‘contracted out services’ is now difficult to find. We have been informed that an update to the ‘employment status manual’ is due. Until then, some end users, not able to find HMRC endorsement of the consultancy model, will in some cases continue to ban PSCs, or look instead to the expensive comfort of the very biggest ‘consultancy’ firms. Supply chains will adapt over time, but long-term change will have hit the sector already.
Clarity on Statement of Work (SOW)
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 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.
If consultancies are to be considered a viable option, then working practices need to be revisited, and contracts will often need redrafting. Also, the organisation receiving the supply of consultancy services, must be careful not to return to old ways and start to take control of the consultancy workers on site.
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 very often have a mixture of permanent employees and subject matter expert freelancers, used occasionally and more likely to be outside. A consultancy supply, or a SOW assignment, doesn’t guarantee ‘outside’ IR35 status for contractors.
In summary, in the right situation, the consultancy solution certainly can offer benefits for end users, recruitment businesses and contractors. But like so much around the off-payroll legislation, it’s very easy to get it wrong…
Here are some other articles penned by Chris James which focus on different aspects of the off-payroll working rules:
- What is the ‘small company’ exemption? – If you work for a company which is defined as ‘small’, then the new off-payroll rules do not apply. But this exemption isn’t as clear cut as one might think.
- Should I keep my limited company if I’m caught by the off-payroll rules? – Although you may be tempted to shut down your limited company, there are some compelling reasons why you might be better off waiting for a while.
And some other useful guides here:
- Retrospective action over IR35? – What happens if your client determines your contract to be inside-IR35, and changes your status from outside IR35? Will HMRC decide that your previous contract should always have been inside?
- IR35 off-payroll FAQs – Many of the most frequently asked questions answered by an employment status expert.