Contractors’ Questions: Who has responsibility for IR35 when a consultancy supplies contractors?

Contractor’s Question: In light of HS2 potentially owing £9.5 million for seemingly wrongly expecting its consultancy to assess the IR35 status of HS2 contractors, can you please confirm what is a ‘contracted-out’ service? And can this outsourcing to a consultancy where that consultancy qualifies as a ‘small company’ save all in the chain from the risks and pain of administering the off-payroll rules?

Expert’s Answer: The exemption from the off-payroll rules for contracted-out outsourced services, when supplied by a small company is a very attractive proposition but one that is fraught with complications and one that needs very careful consideration. 

This is not an issue that can be dealt with by any IR35 status tool including CEST, as it is (and should always be) the starting point in any IR35/Off-payroll decision and calls for specialist IR35 expertise. Unless and until you have dealt with the basics first, no tool output is reliable.

First points to consider with a consultancy in the chain when trying to be IR35-exempt:

  1. Who is the client?
  2. Who is the fee-payer?

These sound like easy questions, but this is where the fun begins! 

Who is doing what and for whom?

Where there is a supply of labour, as well as services, even in a contracted-out situation, the off-payroll rules may still apply. All will depend on close examination of exactly what is being provided and by whom.

Problem areas

The typical small consultancy will claim it is the client who has responsibility for IR35 and will say their small consultancy is outside the rules. But all will depend on the contractual terms and the reality of the working practices.

The small consultancy may or may not also be the fee-payer. There could be an agency between the consultancy and the PSC, in which case the agency would be the fee-payer.  Examination of the contracts and working practices may show that the PSC is being provided to a medium/large business, so is this business the client?

Watch out too for agencies providing a “fully managed service”, as this often turns out to be a recruitment/payroll service, rather than the agency actually being responsible for the work. There are also cases out there where it is a consultancy with a genuine outsourced service but some instances where they are ‘body shopping’ workers in, as a favour to the customer with no responsibility for the work.

Due diligence – questions to ask before you start

Where there is a genuine outsourced service, you (as a contractor) will be responsible for your own IR35 decision under the old IR35 rules (the Intermediaries legislation of 2000). But do not just take the consultancy’s word for it! Get it in writing and remember that arrangements can change over time. For example, the consultancy may become medium-sized, and /or the end-client may change their view and issue inside IR35 Status Determination Statements, even long after the work has begun -- potentially leaving you with a huge problem.

10 IR35-related queries/ points to ask/consider when contracting via a consultancy

  1. Why have I not received a Status Determination Statement (SDS)?
  2. Where you know you are providing services to the consultancy’s customer, seek confirmation in writing from the consultancy that the customer sees this as an outsourced service and will not be issuing SDSs.
  3. Ask for written confirmation that the consultancy is a ‘small company’ exempt from the off-payroll rules, and ask for written confirmation that you will be advised if/ when its ‘small company’ status changes.
  4. Review your written contracts to ensure they accurately reflect the working practices.
  5. Alarm bells should ring if you are part of a consultancy customer’s team and find yourself reporting to the end-customer (rather than the consultancy).
  6. Look for evidence to show that the consultancy is responsible for the work. If they only pop in occasionally for a chat with you, they may just be an agency and not a consultancy.
  7. Remember, a Statement of Work contract is not a silver bullet.
  8. Don’t forget about all things IR35. Keep evidence to show that your contracts and working practices and interactions with others demonstrate an outside IR35 position.  
  9. Consider seeking a Confirmation of Arrangements document from the consultancy to support an outside IR35 position.
  10.  Consider seeking an independent second opinion -- from a specialist -- to demonstrate that you have taken ‘reasonable care’ with all of this, to protect your own position.

Key message

The ‘small company’ exemption from the off-payroll rules for consultancies that are in fact small companies is an excellent thing, providing it is true and all the paperwork and actions support it.

The expert was Kate Cottrell, co-founder of status advisory and IR35 off-payroll specialists Bauer & Cottrell.

Thursday 18th Aug 2022
Profile picture for user Kate Cottrell

Written by Kate Cottrell

Kate Cottrell from Bauer & Cottrell Limited - leading UK IR35 expert who has been contributing IR35 guidance, commentary and articles to ContractorUK for many years.
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