Where a fully contracted-out service is provided, the off-payroll rules are not applicable and the responsibility for determining IR35 status will remain with the personal service company rather than the end client.
Many organisations impacted by the off-payroll rules in the public sector have been under the impression that if a contract can be amended to reflect a managed service provision, and to include a very detailed scope of work, that this would be sufficient to demonstrate that contracted-out services are being provided. However, HMRC’s recent updates to the guidance, which include examples of what is and what is not a contracted-out service, shows quite clearly that a detailed scope of works will not be enough.
“The rules do not apply where a public authority has fully contracted out services to a third party (like an outsourcing company) and the workers do not personally provide their services to the public authority.”
Whilst this definition has not changed, HMRC have now provided examples of what constitutes a contracted-out service to avoid misunderstandings and to stop organisations from attempting to contrive their arrangements to make it appear as though contracted-out services (also known as ‘managed services’) are being provided.
HMRC’s examples do make it very clear. Where individuals are being provided, i.e. there is a supply of labour, it is highly unlikely that this will be a contracted-out service;
“The client, the Ministry needs to hire 15 consultants to advise it on how best to design a new HR system to integrate with the outsourced payroll system. They will work mainly at the Ministry office and be managed by the Ministry’s implementation project manager. X-Outsourcing PLC supply 15 consultants and send CVs to the Ministry for approval. The contract is for the provision of consultancy services. The bill is for 15 consultants at £400 per day…”
“Midshire County Council puts out window cleaning to tender as part of a building services contract covering cleaning and ground maintenance to a required standard. The county hall has 500 windows.
X-Outsourcing PLC win the contract for this and other building services. They subcontract the window cleaning to Bob Ltd at £5000 to clean 500 windows twice a week. X-Outsourcing PLC does not supply labour to the council. Bob carries out some of the work himself and pays two employees to work with him and hires machinery and a cradle.”
Any organisations who were relying on the contracted-out or managed service provision to avoid the application of the off-payroll rules will be sorely disappointed by HMRC’s examples and may need to rethink how to move forward, particularly when the off-payroll rules are implemented within the private sector from April 2021.
If you are an agency or client looking for advice around the off-payroll rules, feel free to get in contact with a member of our team.
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