CONTRACTED-OUT SERVICE REVIEW

Two key questions many companies ask in relation to the off-payroll rules are:

1. who is responsible for making a determination and
2. who is liable if that determination proves to be incorrect.

For traditional labour supply chains, the answers to these questions are relatively straightforward. HMRC themselves state that “in most cases it will be obvious who the client is” and that “where a person enters into a contract with an intermediary for the supply of a worker, they will be the client”.

But, as many organisations will know, there are numerous instances where this is less clear cut. As IR35 reform is implemented and then subsequently policed, it is vital that private sector firms take due diligence on both their traditional labour supply chains, but also any alternative arrangements where contractors may be involved.

The Contracted-Out Service Review provides businesses seeking to understand the impact IR35 reform will have on their business, with an independent review of your arrangements/engagements in order to ascertain whether they would be considered genuinely ‘contracted-out’ under the off-payroll rules (in effect as of 6th April 2021).

If services are deemed to be genuinely outsourced, the supplier of the services (i.e. the consultancy or agency) is considered the client for the purposes of IR35 and therefore carries the responsibility for determining the status of its contingent workers where they operate through personal service companies.

Examples of arrangements where this should be considered could include (but is not necessarily limited to):

• Consultancy firms delivering services to clients;
• Statement of Work (SOW) based arrangements; and
• Engineering companies delivering projects to an end user.

There are a number of factors that need to be considered when determining whether an arrangement is an outsourced or contracted-out service. If you failed to take due consideration when assessing if the engagement between you and your supplier is out of scope of the legislation, you could be failing your obligations under ‘reasonable care’ and in turn assume responsibility of the fee-payer, and therefore be liable for any unpaid tax on any engagements which should have been assessed.

Given the increase in such arrangements in the lead-up to the implementation of the off-payroll rules, it is likely to be an issue HMRC target. The government’s introduction of a Targeted Anti Avoidance Rule (TAAR) in the final raft of changes to the legislation could be used as a key weapon in this area.

Both the client and supplier must be in agreement as to their opinion of the arrangement. This means you should have that agreement in writing, and it should include specific details of exactly who will manage the responsibility for IR35. Remember that there are some illegitimate suppliers out there who claim to be selling an outside-of-IR35 golden ticket. You should be seeking to engage only with credible, respected, and well-versed organisations who have a background in providing genuine outsourced services.