CAN CONSULTANCY ARRANGEMENTS BE USED TO ADDRESS IR35?
The off-payroll rules (‘new IR35’) apply to the supply of labour, not the supply of whole services, so the supply of what’s known as contracted-out services is not included.
Instead, the supplier of contracted-out services becomes the new end-user under the off-payroll rules, instead of the original end-client.
So, if a bank, for example, receives contracted-out services from a consultancy business, the bank is no longer the end-user for off-payroll purposes, and can no longer end up with liability transferring back to them should the supply chain later fail, and HMRC shows that there is additional tax to pay under the rules.
In addition, the new end-user, the consultancy business, may itself be small. If so, the consultancy business doesn’t need to follow the new rules either, and any contractors involved, using their own PSCs (personal service companies), have to apply the old IR35 rules as they would today.
However, people looking to find HMRC guidance on when this does and doesn’t apply may be disappointed. Guidance relating to ‘contracted out services’ has been taken down (I can’t find it anyway) from the public sector sections of HMRC’s help pages. I am told that an update to the ‘employment status manual’ or ESM is due very soon, dealing with this issue.
Until then, some end users, not able to find HMRC endorsement of the consultancy model, will in some cases continue to panic and ban PSCs, or look instead to the expensive comfort of the very biggest ‘consultancy’ firms, such as the big 4 accountancy businesses. This will change over time, but long term change will have hit the sector already.
Consultancy services are often 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 or otherwise not genuine, the protection sought will be missing. If contracts change over a weekend, but the provision of services remains broadly the same, HMRC may well feel they have something to investigate.
As with other areas of the ‘off-payroll’ crisis, working practices need to be revisited, and contracts will often need redrafting.
In addition, the prima face end user (e.g. a bank) receiving the supply of consultancy services, must be careful not to slip into old habits, and start to take control of the consultancy workers on-site – these must be managed by the consultancy business or we are heading back towards a supply of labour, and the consultancy model will not be acting as intended.
So, in the absence of HMRC guidance, what does a genuine consultancy offering look like?
- It will commonly have an overall price for the provision of the whole project. This will, of course, be calculated by reference to the charge out rates of those working on the project, but the purchase made by the original end user must be of a whole services, not just people at day rates.
- The consultancy business should choose who and how many workers are involved in the project.
- It should be able to make a loss on the project, or more of a profit if the project is managed well.
- The original end user should only interact with the consultancy business workers where operationally necessary, via milestone and scoping meetings etc.
Don’t forget 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. So a consultancy supply, or an SOW assignment, doesn’t guarantee ‘outside’ IR35 status for contractors.
So in right situation, the consultancy solution can offer benefits for end users, recruitment businesses and contractors. But like so much around the much-maligned off-payroll legislation, it’s very easy to get it wrong…
A version of this article was published by ITContracting.com.