Calling a supplier a consultancy does not move IR35 responsibility to it. If the arrangement is really a supply of workers, your organisation is the client under the off-payroll rules and carries the risk, whatever the contract or the supplier says.
Most IR35 commentary focuses on blanket bans and contractors wrongly placed Inside IR35. The opposite problem gets far less attention. Some agencies now position themselves as consultancies or specialist providers, tell the end client that IR35 is their responsibility, then treat contractors as Outside IR35 on questionable grounds. It may get you access to people quickly. But the risk sits in your supply chain, out of sight, and grows every month the arrangement runs.
Why are agencies calling themselves consultancies?
Since the 2021 private sector reforms, the end client decides a contractor's IR35 status. Many large organisations responded cautiously, with blanket Inside IR35 decisions or bans on limited company contractors. That made some roles hard to fill. A "consultancy" model offers a way round it. The pitch usually runs like this:
- The supplier contracts with you to deliver a service, often under a statement of work.
- It tells you the engagement is "contracted out", so IR35 is their responsibility, not yours.
- It places contractors with you and treats them as Outside IR35.
- Day to day, those contractors work in your teams, on your priorities, much like any other contractor.
Often the engagement exists because of a headcount freeze or no budget for a permanent hire, which tells you the need was for people, not an outcome.
For a hiring manager under pressure, this feels like a solution to a grey area. You get the skills you need, quickly, with someone else apparently holding the risk. The problem is that the label and the reality can be two different things.
In practice, we regularly see service providers and consultancies push clients towards a statement of work, often companies with their own recruitment arm or that started life as recruitment businesses. By its label, the arrangement is presented as a contracted-out service. Read the SoW, though, and the supply-of-labour features creep in: payment based on hours worked rather than deliverables or milestones, the client remaining responsible for the work, and the individual reporting to a nominated client supervisor who directs the work and evaluates the output. When we’ve carried out worker classification assessments on these engagements, the picture is usually the same. There’s no genuine right of substitution, the client keeps control over when and where the work is done, and beyond a laptop no equipment is needed. Even so, the supplier maintains that it is the client for off-payroll purposes and that, even if it isn’t, the contractor sits outside IR35 anyway. For the end client, that combination is a significant and often unrecognised risk. If HMRC concludes there was no genuine contracted-out service, the client is the one left responsible for the status determination it never made.
Who is the client under IR35 when a consultancy is involved?
It depends on how the work is actually done, not on what the contract calls it. Only a genuine, fully contracted out service moves the client role to the provider. HMRC's guidance is clear that "no matter how a service is labelled, if the service includes an element of labour supply", the client question still has to be answered. A statement of work on its own does not change that.
We explain the full test in Understanding contracted out services and IR35 compliance. The quickest way to spot a relabelled agency is to compare what the contract says with how the work runs day to day.
| Genuine contracted out service | Labour supply with a consultancy label | |
|---|---|---|
| Who chooses the people | The provider. You have no say in who delivers | You interview, select or name individuals |
| Who directs the work | The provider manages its own people | Your managers set tasks and priorities |
| How it is priced | Fixed price or milestones tied to deliverables | Day or hourly rates per person |
| Who carries performance risk | The provider, with penalties for missed targets | You, if the work runs late or over |
| How workers fit in | They work as the provider's team | They sit in your teams, follow your hours, use your systems |
| Who is the IR35 client | The provider, if it is medium or large | You |
HMRC's own worked example describes an agency supplying four IT contractors under a statement of work. They worked alongside the client's staff, kept the client's hours and were paid daily rates. HMRC concluded the arrangement was not genuinely contracted out, so the medium-sized client was liable.
We covered the statement of work side of this in Does IR35 apply to a Statement of Work? and Statement of Work or pseudo-employment?
What happens if the consultancy's Outside IR35 decision is wrong?
If HMRC finds the arrangement was really labour supply, your organisation was the client all along. That has three consequences.
- You never made the determination you were required to make. The client must issue a Status Determination Statement to the worker and the party it contracts with. A consultancy's internal decision does not do that for you.
- You cannot show reasonable care. HMRC expects each client to carry out a complete and thorough determination and keep records. Where it does not, responsibility for the tax and NICs moves to the client. See what reasonable care means for IR35.
- Unpaid tax can travel up the chain. Since April 2021, HMRC can recover unpaid PAYE from the party it deems to be the end client.
Why does the risk build over time?
Every month the arrangement runs adds another month of potential tax, NICs, interest and penalties. HMRC can generally look back four years from the end of the relevant tax year, six where behaviour was careless and up to 20 where it was deliberate. For private-sector clients, exposure under the off-payroll rules runs from April 2021. Long-running engagements also tend to drift. A contractor brought in for a defined project becomes part of the team, and any case for a contracted out service weakens with each extension.
Why is this a supply chain visibility problem?
You cannot manage a risk you cannot see. Consultancy arrangements are often bought through procurement as a service, so the individuals doing the work never appear in HR or contractor records. In many organisations there is no central source of truth showing who is actually working for them, through which supplier and on what terms.
This gap is not new. In IPSE research from early 2022, 48% of private sector clients did not know what share of their engagements were Inside or Outside IR35, and 22% said their statement of work contracts had increased since the reforms.
That is why supplier assurance matters as much as contractor assessment. The questions are simple: which suppliers are providing people rather than outcomes, and who made the IR35 decision for each of them? Our external workforce governance guide sets out how to build that oversight.
CoComply is an external workforce compliance platform. It helps large organisations classify work correctly, route each engagement through the right process and control the risk across their supply chain.
Is every consultancy arrangement an IR35 risk?
No. Plenty of consultancies deliver genuine outsourced services. They own the outcome, manage their own people and price against deliverables. In those cases the client role does move to the provider, provided it is a medium or large business. If the provider is a small business, neither party holds client responsibilities and the worker's own company decides status.
Outside IR35 is also a legitimate outcome in its own right. Many contractors are rightly Outside, and blanket Inside decisions cause real harm. The point is not that consultancy models are wrong. It is that the decision needs to rest on evidence about how the work is done, and you need to be able to see it.
The courts take the same approach. In HMRC v Professional Game Match Officials Ltd (2024) UKSC 29, decided on 16 September 2024, the Supreme Court looked at the whole picture of how the relationship operated. It held that neither mutuality of obligation nor control alone settles the question.
For how responsibility is split between client, agency and contractor more widely, see Who is responsible for IR35?
Where do we start with checking our consultancy arrangements?
Start with a list, then test each arrangement on substance. Use this checklist for every supplier that describes its service as consultancy or contracted out:
- List every supplier providing people under a consultancy, managed service or statement of work contract
- Note who chose each individual and whether you interviewed or named them
- Check who sets their day-to-day tasks and who they report to
- Check how they are paid: day rates per person or fixed prices against deliverables
- Ask the supplier who made the IR35 determination and request the evidence
- Confirm whether the supplier is a small, medium or large business
- Record the outcome, agree in writing who the client is and set a review date
- Re-check on every extension or change in scope
Where the answers point to labour supply, treat your organisation as the client. Make your own determination, issue an SDS and keep the records.
Next step: Not sure whether your statements of work are genuinely contracted out? Request a free SOW and MSA analysis and we’ll show you where the labour supply risk sits.
Frequently asked questions
- Can a consultancy take on IR35 responsibility for us? Only if it provides a genuine, fully contracted out service and is a medium or large business. If the arrangement includes any labour supply and you are directing the work, you remain the client.
- Does a statement of work put a contractor Outside IR35? No. HMRC says a statement of work does not automatically show an engagement is contracted out. Status depends on how the work is actually done.
- What are the warning signs of disguised labour supply? Day rates per person, you choosing the individuals, your managers directing the work, contractors working inside your teams and an engagement that exists only because of a headcount freeze or no budget for a permanent hire.
- Who pays if the Outside IR35 decision turns out to be wrong? If you were the client and did not take reasonable care, the liability for tax and NICs falls on you.
