How does working through a consultancy impact IR35?

Working outside IR35 while operating through a consultancy

Moving forward from the 6th April 2021 arrival of IR35 reform in the private sector, some contractors may still be wondering whether operating through a consultancy will allow them to continue working outside IR35.

However, the answer, as you can imagine, isn’t always black and white. So, to help you understand, we’ll take you through a few possible scenarios. 
 

Engaged by a medium or large consultancy

Let’s say you work through a medium or large consultancy that provides a genuinely ‘contracted out’ service to a client. In this situation, the responsibility for determining IR35 status will transfer from the contractor to the engager - which would be the consultancy. So in short, IR35 reform applies.

For this to be the case, the services of the consultancy you are engaged by must be genuinely outsourced and not merely a provision of labour disguised as a consultancy agreement. If the taxman has an inkling that the agreement between the consultancy and the engager isn’t reflective of a genuine managed service, there’s a chance that the engager will become responsible for IR35.

As with other IR35-related considerations, whether or not it is genuine will largely boil down to what happens in reality and not the written contract alone. Some key questions that should be asked include:

• Are the services entirely lead and managed by the third-party supplier?
  
  
• Is the supplier responsible for managing the resources required?
  
  
• How is work is actually provided? For example, to what extent do any workers interact with client staff?
  
  
• How is payment for the project structured?
  
  
• Who do the workers report to or liaise with?
  
  
• Can the client request the services of a specific individual?
  
  
• Who would be notified if there were any defects or problems with the services?
  
  

We have seen several large client organisations looking to consultancies to replace populations of agency-sourced contractors in a bid to absolve themselves of any IR35 responsibility or risk. To reiterate, this is compliant and will mean the organisation will not need to administer IR35, nor carry the risk, but the service must be genuinely contracted out. 
 

Forming a ‘small’ consultancy

Contractors may have considered joining together to form a 'consultancy' in a bid to sidestep the IR35 changes. From a compliance perspective, creating a genuine consultancy which you then work through as a contractor is acceptable. And whilst it does mean that you would retain the right to determine your own IR35 status (assuming this consultancy falls under HMRC’s criteria of a ‘small’ company), there’s a big difference between providing a service as a traditional contractor and a consultancy.

To do so compliantly, you would need to completely renegotiate terms with your client, because the arrangement a genuine consultancy provides differs considerably to that of an outside IR35 contractor. 

Shoehorning an existing, time and materials-based contract with a client into a consultancy arrangement would be very difficult - particularly if you are continuing to provide the services yourself. 
 

A ‘Statement of Work’

As a result of IR35 reform, a number of individuals and organisations have put in place a ‘Statement of Work’ in order to show - on paper at least - that clients who receive ‘outsourced’ services will be exempt from the reform.

Similarly to other consultancy arrangements, a Statement of Work must reflect the reality of the engagement. Forming a consultancy simply to avoid IR35 reform is fraught with difficulties - from an IR35, logistical and financial perspective. 

If you create a consultancy, but still provide a personal service, HMRC is likely to consider you a contractor. Needless to say, the tax office is well aware of contrived workarounds to IR35 reform and will continue to be on the lookout for them.

For our full range of IR35 services for contractors, please click here.

[Updated: 08/06/22]