Do contractor alliances avoid IR35?

When is a PSC not a PSC - Can contractors join together to form a company and avoid the IR35 reform?

With IR35 reform coming into force in April 2020, shifting the responsibility of determining a contractor’s status to the end client, many contractors are wondering how this can be avoided.

With the changes only months away there are many things contractors, agencies and end clients can be doing to prepare. Attempting to avoid the reform, however, is not advisable.

Many contractors have considered closing their business and collaborating with other contractors to ‘club together’, forming new companies to get around the new rules. This, though, will not enable contractors to avoid IR35.

IR35 applies if:

• A worker (or their family), control more than 5% of the ordinary share capital of the Personal Service Company; OR

• A worker (or their family) are entitled to receive more than 5% of any dividends from the Personal Service Company: OR

• A worker receives, or could receive, payments or benefits from their company which are not salary but could reasonably be taken to represent payment for services they provide to clients.

What is a PSC?

While there is no clear definition of a Personal Service Company (PSC), which HMRC often use to their advantage, this can be loosely defined as follows:

• A PSC is a company that predominantly sells the services of an individual, or small group of individuals.
• The individual(s) providing the services are also owners/directors of the PSC.

If a group of PSCs came together to form a new business this will not avoid IR35 and it will still need to be a consideration for each PSC working within the new company - IR35 could still apply to each worker.

Therefore, simply pulling together to form a new business will not avoid IR35.

If, however, the PSC were to become a Managed Service Provider (MSP) and any services provided were genuinely an ‘outsourced’ or ‘contracted out’ service, the responsibility for IR35 will rest with the MSP rather than the ultimate client. The difference between a PSC service and an MSP service is outlined below:

PSC – A client requires a new IT security system to be installed. PSC Limited sends an individual, James, to undertake the services from the client site for a fee of £250 per day. IR35 must be considered as James is providing the services personally.

MSP – A client requires a new IT security system to be installed. MSP Limited agree to create such a system for a fee of £200k over a 6-month period. MSP Limited create the new system whilst bearing all cost and risk; the client has no bearing over which, or how many, workers deliver the project. As it is fully contracted out, the responsibility for IR35 will rest with MSP Limited.

Whilst having numerous contractors working within the same company will not automatically deem the company to be outside of IR35, it will come with its benefits. This arrangement will demonstrate the business has numerous income streams and doesn’t rely on one individual. It would show the company can carry out contracts concurrently and that services are not exclusive. It will also help to demonstrate that substitution may be logistically possible; a key pointer toward being outside of IR35.