IR35 and Data Consultancies

In this article we will explain why large and medium sized organisation will benefit from engaging with Datahub Consulting. For many years Datahub have worked with large organisations in gas & oil, retail, private education, and skin clinics etc, as well as being a supplier to the UK Crown Commercial Services.

At the moment a lot of large organisations are worried about the IR35 reform and engaging with freelance contractors. There is some element of confusion and misunderstanding. For years large organisations have worked with individual contractors paying for services based on a day rate. Where the contractor has provided additional resource to the organisation based on a fixed duration.

So, in this article we will be talking about IR35 and data consultancies, the impact of IR35 on both the consultancy and the end client, where the IR35 burden lies, and clarity on the IR35 reform. So lets get into it.

Useful terms in this article:

• The “end client” is the company requiring the service and will be responsible for any payments.
• The consultancy is the supplier, the company providing the service that will receive any payments.
• PSC is Personal Service Company which provides personal services of a single contractor to organisation (end client) usually via an agency.
• Agent is the company that the organisation engages with to source and provide the services of a contractor. The contractor will usually be paid via the agency that will charge a fee to the organisation (end client).

What is IR35?

In the UK IR35 reform kicked in, in April 2020 for private sector organisations. For the public sector it had already been implemented for some time. Prior to the reform, IR35 has been in place since 2000 to address tax avoidance by individual workers, providing services under a Personal Service Company (PSC). Where HMRC would deem that the role, duties, and services could be undertaken by an employee.

Any contractor working under IR35 will be taxed at source and then given the remaining money for themselves. A contractor under IR35 will be required to register and work under a third-party umbrella service and not under their own limited company. The worker will then be paid via the umbrella company on a PAYE system. So taxed in the same way as an employee without the benefits of an employee such as paid sick leave, paid holiday, pension etc.

Since the reform was implemented, the legislation is causing a lot of controversy as a lot of large organisations are imposing a blanket inside IR35 assessment for contractors. This blanket assessment is being used without undergoing the necessary status check on a case-by-case basis. Lets look how it works with an end client engaging with a contractor via an intermediary.

• The end client requires additional resource and gets an agent to source a contractor with the necessary skills.
• The contractor will go through an interview process with the end client.
• The contractor may take direction from the end client with respect to workload, priorities, and approach.
• The end client will pay the agent, and the agent will take a percentage and pay an agreed amount to the contractor.

In this instance the end client will be responsible for determining if IR35 applies. If this determination is incorrect then the liability will be with the end client.

Red indicates IR35 liability.

Are Contractors the same as an Employees?

Contractors in most cases are providing technical skills and services that organisations don’t need on a permanent basis, hence the reason for engaging a contractor. These services are on a project-by-project basis and not required permanently. I’ve spoken to a number of large organisations, some of those clients of Datahub. The topic of IR35 has come up in the conversations. I’m being told that organisations are making a blanket inside IR35 decision to protect themselves. They are saying that as the reform is not transparent, there are grey areas, and they don’t want to be open to investigation.

Definition of a Small Organisation

With IR35, HMRC define any organisations as large, medium, and small. The IR35 off payroll reform only currently applies to large and medium size organisations. So, what is the definitions and where does IR35 apply? To be considered as a large or medium organisation, the organisation must meet two or more of the following:

• Have a turnover of £10.2m
• Have a balance sheet total of £5.1m
• Employ 50 or more people.

If your organisation does not meet two of the above, then you are considered a small organisation and are exempt with IR35. This is the case with Datahub Consulting. As a boutique consultancy we don’t meet two of the above.

Does IR35 Affect Consultancies

In short it shouldn’t if the consultancy is operation as a true consultancy.

A consultancy can provide the technical skills on a project-by-project basis for clients that don’t have the internal skills. Requiring these skills and technical knowledge for a particular project may not be a viable reason to employ a new person.

Consultancies like Datahub can work based on deliverables and not purely on a day rate. The benefit of this, is that the responsibility of delivering a fit for purpose solution will lie with the consultancy and not the end client.

The consultancy will provide employees or contractors with the skills and knowledge to deliver the services. The consultancy will be taking the financial risks. In IR35 terms, they also can provide (if necessary) a substitution. Substitution is where another person can step in to continue the work if the initial person(s) cannot continue for any reason. With a consultancy there is a team of resources and not just a single resource.

Red indicates IR35 liability.

In the example above, a consultancy will have 1 or more customers that are the end client. If these customers are large or medium size organisations and they engage with a consultancy, then the IR35 liability will move to the consultancy. This is because the consultancy will be responsible for supplying the resource.

• If the consultancy is considered a large / medium size organisation, regarding any contractors working for the consultancy then IR35 may apply but the liability will be with the consultancy, not the end client.
• If the consultancy is considered a small organisation, then as long as the work is carried out by consultancy employees, or contractors engaged by the consultancy, then IR35 will not apply.

Statement of Work

When working with a consultancy there is a statement of work drawn up. This document is important for the delivery of the work. It will include scope, timeline, deliverables, costs, and any terms of payment. Usually the terms of payment will be linked to deliverables or key milestones within the project.

Why Do Large Organisations Like Working with Datahub?

As a small consultancy, engaging with Datahub Consulting means that large and medium sized organisations will not be responsible for the assessment of IR35. As described in the diagram above the responsibility will shift to Datahub. If you are a large organisation looking to use external resource for a project, then we will be happy to discuss.

Some organisations think that engaging with a consultancy is far more expensive than using contractors. This is not the case. Datahub have cost effective solutions that is comparable to using a highly knowledgeable contractor. For this reason we have delivered successful projects to large organisations in UK and overseas. Please have a look at our case studies.
Case Studies | DataHub Consulting

References

A great resource for IR35 is Dave Chaplin who’s the owner of IR35 Shield.
IR35 Shield | IR35 status tools, consultancy and IR35 defence.

Datahub provides services for

• Analytics,
• Business Intelligence,
• Digital Transformation,
• Machine Learning,
• Risk & Compliance,
• Training services

Want to understand more please visit our website.
Data Consultancy Services | Datahub Consulting

Contact Datahub Consulting
Contact us | DataHub Consulting

In Conclusion

There are benefits for large and medium size organisations working with small consultancies. The IR35 assessment and liability moves away from the organisation and shifts to the consultancy. Based on current legislation, at the time of this article IR35 only affects large and medium consultancies. With the small organisation exemption then small consultancies have the IR35 responsibility but it will not impact them with any employees and contractors employed by the consultancy.

With HMRC, Datahub are considered a small consultancy and as such IR35 does not apply. So, any large or medium size organisation working with Datahub means that the IR35 burden will shift away from the organisation.