IR35 expert warns contractors not to club together to form consultancies

An advisory on IR35 is warning Personal Service Company contractors against clubbing together to form consultancies as a crude way to bypass changes to the rule from April 2020.

Qdos Contractor issued the advice in the wake of a growing number of banks heading off the changes applying to them by desisting PSCs, but taking a softer stance with consultancies.

One bank in its memo on the changes even pointed out that ‘external companies imported to provide a specified commercial result’ would be more likely to have nothing to worry about.

'Small' business

It is also less worrisome for the banks as the engagers too, because if PSCs are contracted to a consultancy -- which is servicing the engager, is it the consultancy who has to set IR35 status.

“[That’s the case] unless [the consultancy is] a ‘small’ business,” advised Qdos Contractor’s chief executive Seb Maley.

“Note, however, that the services the consultancy provides must be genuinely ‘contracted out’ and not merely a ‘provision of labour’ disguised as a consultancy agreement.”

'Clubbing together'

Writing online, the IR35 expert said a number of people have asked about working through a consultancy (their own or one of the big players), since some banks all but banned PSCs.

“Some [of these] contractors have suggested clubbing together to form a ‘consultancy,’” Mr Maley said.

“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.”

'IR35 workarounds'

The adviser explained that if such contractors still went on to provide a personal service – albeit under a ‘consultancy’ arrangement -- they could still be categorised as a PSC.

“HMRC will be well aware of workarounds to IR35,” he warned, while implying PSCs still have time to undo any phoney arrangements by adding: “I imagine they’ll be on the lookout for them after next April.”

The warning comes as the contractor sector is finalising a letter to be sent to every single member of parliament, calling on them on behalf of the UK's PSC contractors and other flexible workers to oppose the rollout of the off-payroll reforms. Signatories of the letter include ContractorUK.