Contractors' Questions: Where do the off-payroll rules catch consultancies?

Contractor’s Question: I'm a contractor at a public sector body (PSB) and work with other people -- contractors, civil servants, employees of consultancies. By sight, it’s tough to tell who’s got what employment status as our workloads are similar.

Based on April 2017’s IR35 guidance, I would term anyone who is not a direct member of the PSB’s staff a ‘disguised employee.’ But it is only contractors who will have PAYE and NI deducted from their invoices before payment to the PSC. Employees of consultancy companies are billed at a far higher rate than employees of limited companies, yet won’t always suffer this deduction before the company is paid. Why will ‘consultancy’ employees be potentially exempt, despite their work being almost identical to that of 'PSC' employees?

Expert’s Answer: Where an arrangement involves a consultancy company, it is not necessarily the case that the arrangement would automatically fall outside the scope of the new rules.

The consultation document (on page 13) was clear that “the new legislation will apply not only to employment agencies and employment businesses, but also other types of business that supply workers to a public sector client such as a consultancy or outsourcing specialist”. Without this broad definition, the concern was that contract arrangements would simply be amended to reflect the provision of a service rather than the supply of a worker.

The situation you describe -- where a consultancy is providing individuals to fill roles alongside public sector staff and PSC contractors -- is addressed in the examples within the consultation. Example 3 confirms:

A consultancy PLC contracts to provide on-site consultancy services at the Ministry. This consists of ten information management consultants to work in the Ministry’s policy unit for up to six months, as well as some software and online support. The supply of ten staff in this contract would be within the scope of the proposed measure. The consultancy would need to use the online tool and consider the new rules.”

If IR35 applies, the consultancy (as the fee-payer) would need to make the appropriate deductions if those individuals’ engagements were via PSCs.

The Technical Note that was issued along with the draft legislation provided an example of an arrangement where the legislation would not apply, and that is for specific, outsourced services.

Jasmine’, a website designer who is engaged on a fixed fee basis to design and build a new website, does not fall within the scope of the new rules. She is not filling a role, rather providing a whole service, the fee for which covers her equipment, time and staff costs (should she want/need to engage others to assist on the project).

So, for the arrangements of the consultancies you describe to fall outside of the regulations, the invoices for the ‘employees’ won’t actually be going to the public sector body; rather the consultancy will be invoicing for a complete contracted out service, the price for which will include its staff, who if employees, will have PAYE and NIC operated on their salaries, and if consultants, it will be for the PSC to determine whether IR35 applies as is still the case in the private sector.

The expert was Rebecca Walker, an IR35 specialist and status consultant at Abbey Tax.

Monday 20th Feb 2017
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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