Contractors are being warned about forming consultancies together as a way to avoid reforms to the IR35 tax rules, which are due to take effect from April 2020.
Following confirmation from government that the IR35 reforms, known as the Off-Payroll rules, will definitely kick in from next year, a number of banks and financial services firms have announced decisions to stop hiring contractors that work through their own limited companies, but have hinted that they may take a softer stance with consultancies.
The Off-Payroll rules shift the risk of making incorrect IR35 assessments away from individual contractors and on to the companies that hire them, which has made many firms cagey about using contractors at all – and in particular, limited company contractors, who inherently carry an IR35 risk.
However, IR35 specialists Qdos Contractor have warned that simply clubbing together to form a “consultancy”, i.e. a limited company that provides the services of multiple contractors, would not automatically put the consultancy company outside of the remit of the IR35 rules.
“Some contractors have suggested clubbing together to form a ‘consultancy,’” said Qdos CEO Seb Maley. “I would say that this route is fraught with difficulties – both from an IR35 perspective but also logistically and financially.
“Forming a ‘consultancy’ simply to avoid IR35 — and IR35 reform — is probably not a wise move, particularly if you plan to continue working for existing clients.”
Contractors have apparently seized upon clauses in some larger clients’ new IR35 tax policies that indicate the firms will continue to hire contractors if they are contracted-out via a consultancy, because in this scenario the consultancy company would be responsible for setting the contractors IR35 status.
One bank’s memo mentioned “external companies imported to provide a specified commercial result” as being acceptable.
However, industry experts believe that such references to consultancies pertain to well-established commercial businesses such as Accenture or KPMG, and any attempt by contractors to “club together” and emulate this model will fall foul of HM Revenue & Customs rules.
Mr Maley explained that contractors attempting this workaround could have their “consultancy” categorised as a Personal Service Company (PSC), another term for a contractor’s limited company, if they went on to provide a personal service through the sham “consultancy”.
“HMRC will be well aware of workarounds to IR35,” he warned, adding: “I imagine they’ll be on the lookout for them after next April.
“The services the consultancy provides must be genuinely ‘contracted out’ and not merely a ‘provision of labour’ disguised as a consultancy agreement.”
The Off-Payroll rules will shift responsibility for IR35 status assessments away from contractors and onto the clients that hire them, with responsibility for deducting income tax and National Insurance under the PAYE regime falling on the “fee-payer” in the case of IR35-caught contractors – this will usually be the recruitment agency.
Contractors considering such unorthodox means to avoid the Off-Payroll rules are being urged to take advice from income tax specialists and tax professionals.
22nd October 2019.
