Contracted-out services and the IR35 risks

What exactly are contracted-out services, and how could they affect me?

In this article, we will take a look at contracted-out services, also known as outsourced services, in a way that may better help you to understand this means of service provision and consider any associated risks.

The problem surrounding the provision of outsourced services has undoubtedly become more prevalent in light of the off-payroll reform, introduced into the public sector from April 2017, and due to be implemented into the private sector from April 6th 2021, which will mean that the responsibility for determining IR35 status rests with the end client, rather than the contractor themselves.

When the reform was implemented in the public sector, HMRC‘s guidance stated that, where end clients were engaging in fully contracted-out services via a third party, the end client would not need to determine the IR35 status of workers supplied by the outsourced services provider. The service provider would need to determine the status of its own workers.

The rationale behind this is relatively straightforward. If you have engaged a company to provide a package of works, and that company has complete control over the delivery of the works and who it sends to undertake the work, then that company is the true end client and much better placed to determine the employment status of its workers. However, what is not quite so straightforward, is who is and who is not considered a genuine outsourced service provider.

What does it take to be a genuine outsourced service provider?

Many businesses have attempted to set themselves up as a supplier of outsourced services in order to appear more attractive to end clients by putting in place a Statement of Work, defining project-specific activities, deliverables and timelines. However, if that business is supplying labour resource to their end client, rather than a package of services, it will not be considered as fully contracted-out.

So, what exactly is a genuine outsourced service? For an agreement to be considered as fully contracted-out, the following factors need to be considered:

• Are the services entirely lead and managed by the third party supplier?
• Is that supplier responsible for managing required resources?
• How is the work provided in practice? For example, how much do workers and client staff interact day to day?
• Who is it that the workers report to or liaise with?
• Who gets notified in the event that there are any defects or problems with the services provided?
• Can the client request the services of a certain individual? This question relates to personal service.
• How is the payment for the project structured?
  
  

Potential IR35 related risks of seeking to engage outsourced service providers

If an end client should incorrectly assume that a company is providing outsourced services, they may as a result fail in their obligation to assess IR35 status. This puts the end client at risk. Should this be established during an enquiry, the end client would become responsible for operating PAYE and NIC as well as the associated liabilities. So it is vital to ensure any such arrangement is genuine.

With this in mind, we should be consistently looking at the reality of the engagement rather than simply what is written within the contract. The draft legislation states that;

“Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements. Care should be taken to ensure that a labour supply contract has not simply been re-labelled as a managed service. For example, labelling a contract as a contracted-out service or a ‘statement of work’ will not prevent the off-payroll working rules from applying, and the reality of the arrangements should be considered.”

For example, labelling a contract as a contracted-out service or a ‘statement of work’ will not prevent the off-payroll working rules from applying – the reality of the arrangement should be considered first and foremost.

For more information and a few examples of exactly what a genuine contracted out services is, see here (ESM10010).

If a client wants to buy resources, it is going to be difficult to turn this into an agreement for a package of works and it would be much more prudent to discuss a practical process for determining the status of workers supplied and make this as easy as possible, perhaps even by providing them with a solution.

In my experience, having reviewed many agreements and having entered into extensive discussions on this point, genuine outsourced service providers are few and far between.