IR35 reforms: Where consultancies are caught

Amid a growing consensus that it’s not “relatively clear” whether consultancies are caught by April’s IR35 changes, but that it’s actually a grey area populated by talk of ‘deliverables’ and ‘public funds,’ it's worth trying to bring some light to where there is at least fogginess, writes status expert Kate Cottrell, founder of IR35 experts Bauer & Cottrell.

This exclusive article for ContractorUK will explore a real-world example that highlights the difficulty some contractors are having in trying to gauge whether their assignment with or via a consultancy is inside or outside the incoming rules.

As to whether PSCs at consultancies are caught in general, it is unfortunately necessary to establish a considerable number of facts and to review HMRC’s publications to date, to come up with any sort of creditable answer.

How the new IR35 rules have evolved

In the initial HMRC discussion document, there was no mention of the inclusion of consultancies. However, the subsequent consultation document (pages 13 and 14) makes it clear that certain consultancies are now included. This document also states that if you are doing “a similar job” in “a similar manner” to an employee, then whoever supplied you (including a consultancy) will be bound by the new rules. 

Confusion arises where the new rules exempt those private companies (which would include a consultancy) carrying out a public function. The draft legislation defines the public sector and covers the exemption. The whole issue boils down to whether there is a supply of people or a supply of services.

A simple question of supplying people or services?

The examples given in the consultation document and the guidance issued following Autumn Statement 2016 appear clear-cut for those that are exempt i.e. if a private company has a contract to build a hospital or to run a secure document storage warehouse using their own staff, then the new rules do not apply. 

But the example of a consultancy caught by the new rules (page 14) is not clear-cut and states, “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 new measure.”

In this example, the consultancy is supplying services and people, so it will be necessary to have sight of the wording of the contract between the consultancy and the Ministry in order to establish what is being supplied. It will usually also be necessary to review the procurement terms and processes such as, which framework the contract was secured under. 

When is a consultancy an agency and who is the client?

When undertaking IR35 contract reviews, we often encounter problems in this area with the need to establish if a consultancy is acting, as a consultancy (supplying services) and is the client for IR35, or is really acting no differently to an agency/employment business in the contracting relationship and so is not the client for IR35. The difference is critical to deciding IR35’s application. Indeed, HMRC themselves get this wrong in some IR35 investigation cases. 

A real-world example

Of course, it’s not just HMRC that gets confused by its own rules! Could you say, off the top of your head, whether the IR35 changes are going to apply to Capita’s Agency Supplied Workers (ASW) to the nuclear industry, such as Sellafield Ltd? This is an actual question we received, affecting real-world individuals and companies. We think it shows how there is not, unfortunately, a quick and simple answer, to working out if the April rules will apply.

To work out an answer, let’s start with the definition of ‘the public sector.’ If we turn first to the government’s response to the consultation document with regard to the definition of the public sector, it is clear that they are quite happy for the definition of a “public authority” to be those subject to the Freedom of Information (FOI) Act 2000. This is supported in the draft legislation at 61L i.e. the new rules apply only to services being provided to a public authority. Well, a quick look at Sellafield’s website clearly shows that they are effectively a public authority subject to the FOI Act, so the new rules will apply to them.

Capita ASW

This is where it starts to get complicated. Capita provides all sorts of services, which range from those of an agency/employment business through to full managed services of personnel for end-clients. Again, a quick online search shows that they have won the contract to deal with all of Sellafield’s ASW’s (Agency Supplied Workers).  But what exactly does this involve? They are probably responsible for on-boarding, inductions, security clearances and the general well-being of the workers and the procurement process. But we do not know what they have contracted to supply -- services or people; or both. 

If it is established that Capita is supplying people, then a critical question would be, ‘Will they be responsible for paying the contractors?’ If Capita does pay the contractors, then they will be responsible for making deductions under the new rules.  If there is a chain (see the draft legislation at 61N), and the contractors have been sourced via another agency, then Capita may pay that agency, which in turn pays the contractors and it is this fee-paying agency -- the party closest to the PSCs -- that will be responsible for making any deductions. 

Note; although the legislation deals with chains of agencies in terms of who is responsible, it will be essential for all agencies paying contractors to establish if there is a public authority at the end of the chain.

So in summary:

• Yes Sellafield Ltd is a public authority affected by the new rules;
• But Capita may or may not be a private company undertaking public functions, so it may or may not be exempt from the new rules

An April Fool? Don’t be one

Either way, great care needs to be exercised in this area. We believe it would therefore be foolish for contractors to simply move to a “consultancy,” thinking they can continue to operate outside IR35, as before.

However it is time to take some action now. Remember, these new rules affect all sectors and industries where public money is involved. And just because a company is called a ‘consultancy,’ it does not mean it is a consultancy or is exempt from April’s IR35 changes. So don’t delay in asking some questions today about your contract or assignment now -- and from April 2017. Do not rely solely upon the clauses in your contract. An IR35 contract review that looks closely at your working practices is the starting point for getting the answers you’ll need.