Off-payroll: Medium and Large Consultancies – what you need to know


The small companies exemption means small consultancies may require different advice to medium/large consultancies. Read our guide for small consultancies.

One consequence of the Off-payroll legislation (Chapter 10 ITEPA 2003), which rolled out to the private sector in April 2021, is the increase in medium and large firms using consultancies to supply services for their project needs than using recruitment agencies to source individuals.

This movement is driven by the fact that where a consultancy provides a wholly outsourced service, the consultancy is the “client” in terms of the Off-payroll legislation and not the hiring firm. Therefore, the hiring firm does not need to conduct status determinations, nor should it incur any tax risk. Instead, the consultancy is the “client” in Off-payroll terms, and the tax liability should sit with them.

This popular operating model is perfect for both clients and consultancies. Still, the parties should not be complacent because failure to exercise robust due diligence could mean the scenario unravelling, leaving either party with a hefty tax bill and potentially destroying the consultancy.

As a consultancy owner, if you have spent years building what you believe to be a valuable business, you do not want to discover that you are sitting on a worthless tax time bomb. Pre-emptive due diligence is essential.

IR35 Shield has been active in the mergers and acquisitions market since April 2021, working with buyers, sellers, and their legal teams to provide Off-payroll due-diligence services. This guide shares some of our advice from experience on the front line.

Will your consultancy pass due diligence?

If you own a consultancy, we know all the hard work you have been putting in to build your business, with the intention of the ultimate goal – a sale of your business. You will be seeking a nice lump sum, possibly paying off your mortgage, leaving you with a nice nest egg upon which to retire. We hope you succeed.

Unless you’ve bought or sold a business before, you may be unaware of the extensive due diligence that the buyer will conduct. For sellers, a transparent approach is the best way to avoid future clawback based on uncertainties entered into the contractual warranties.

Anything a prospective buyer identifies as an inherent risk may result in an aborted sale or a significantly lower offer. For high-risk items, you may have no option but to sign personal warrants or provide bespoke insurance (e.g. very expensive) to cover any future downside for the new owner.

If considerable risk sits in the company, you might find most of the consideration locked up in a long earn-out whilst the risk is mitigated.

Unmanaged risk means your nest-egg dreams may turn into a nightmare.

IR35 / Off-payroll risk to consultancies

Under the Off-payroll legislation, the intention for you and your customers is that your services are “wholly outsourced” services. i.e. your firm provides services and not individuals like a recruitment business. You probably don’t see yourself as the old-school “body shop” consultancy.

In fact, as a modern, lean consultancy, you are likely to have a team of core employees who manage the projects you take on. You then hire contractors (or “associates”) to fulfil those project deliverables.

For those associates, you probably don’t consider yourself their “deemed employer,” and to ensure your perception is correct you should be conducting robust IR35 status determinations.

Now for the scary bit. Here are some examples, based on our due-diligence experience, of where your business could fail:

  • Your firm gets investigated by HMRC, and HMRC determines the contractor associates to be “Inside IR35” – you cannot afford proper representation, fees for which could easily exceed £100,000 – you are now trading insolvently. Even if you can afford the defence, unless the case is shut down quickly, you have years ahead of you, embroiled in long-term litigation against HMRC, who have a bottomless purse. No one will buy your business. All this happens even if HMRC were wrong.
  • HMRC investigate your clients and decide that your firm is not providing a wholly outsourced service, is akin to a recruitment agency providing individuals, and that those contractors are also “Inside IR35”. The client claims against an indemnity you signed or litigated based on negligence. Either way, your business is doomed.
  • HMRC investigate your clients and decide that your firm is not providing a wholly outsourced service, is akin to a recruitment agency providing individuals, and that those contractors are also “Inside IR35”. The client claims against an indemnity you signed or litigates based on negligence. Either way, your business is doomed.
  • After years of impressive profits, it comes time to sell. Due diligence reveals that your consultancy model isn’t quite what you think it is and that your firm has built up considerable tax risk: your buyer aborts, and your valuation plummets.
  • HMRC investigates and discovers that you knew your contractors were inside IR35, not paying correct taxes and that you knowingly facilitated tax evasion, breaching s44(4) of the Criminal Finances Act 2017. Scary eh?

Are you going to let any of this happen? Have you done anything to shore up this future risk? Are you putting your head in the sand? Would it not make sense to at least have a preliminary sense check?

Your business can grow and retain value if built on a robust foundation of solid compliance.

How should consultancies manage the risk of IR35 and Off-payroll?

A consultancy owner can follow the Dos and Dont’s below to ensure they maximise their compliance, which should ultimately lead to a smooth sale in the future and maximum valuation.

  • DO: Get your contracts professionally drafted by qualified lawyers.
  • DO: Get your contracts reviewed by IR35 experts with direct experience with IR35 tax tribunals.
  • DO: Conduct status assessments for your contractors.
  • DO: Educate your contractors and clients on IR35 matters.
  • DO: Have a Tax Investigation Service ready to defend you if HMRC knocks on the door.
  • DON’T: Stick your head in the sand and do nothing.
  • DON’T: Operate like an agency and supply people with job titles and “roles”.
  • DON’T: Sign a contract without it being reviewed by a lawyer.

IR35 Shield has extensive experience on the front line of IR35 enquiries and tax tribunals. From our enquiry work, we have contemporary knowledge of arguments HMRC is developing that are not in the public domain. We leverage our defence work to inform our pre-emptive tax defence advice and guidance to help shore up your future tax risk.

How IR35 Shield can help your consultancy

IR35 Shield is your one-stop advisory that can help ensure you comply with IR35 and the Off-payroll legislation.

Our primary focus is assisting firms with IR35 compliance, which includes:

  • Use of our SaaS-based IR35 software (IR35 Shield for Business)
  • Legal consultancy on contractual terms and processes
  • Tax Investigation Service (up to £200K fees included)
  • IR35 enquiry/defence work – including First-Tier tax tribunals
  • Stress testing existing IR35 processes
  • M&A due diligence - both buyers and sellers

IR35 Shield can advise you and, if HMRC investigates, we can defend you.

Please do not leave it too late. Get in touch now!

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