Does IR35 apply to contracted-out services?

HMRC update guidance for IR35 off-payroll rules in the public sector: Contracted out services do not include supply of labour

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.

HMRC’s definition of a contracted-out service is as follows;

“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 example of what is not a contracted-out service

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…”

The key pointers to this not being a contracted-out service are:

• The workers are to be managed by the Ministry’s implementation project manager
  
  
• 15 individuals are to be provided
  
  
• CVs of those individuals are to be submitted to the Ministry for its approval
  
  
• The bill for the Ministry will be for 15 individuals provided rather than a fixed fee for a specific project being undertaken

In contrast, a genuine contracted-out service would look like this

“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.”

The key pointers to this being a contracted- out service are:

• There is a tender process to follow to obtain the contract
  
  
• X-Outsourcing PLC subcontract the window cleaning to another company
  
  
• Labour is not supplied to the Council
  
  
• Bob Ltd engages other workers to undertake the work
  
  
• Bob Ltd provides its own equipment
  
  
• The council pay X-Outsourcing Ltd for window cleaning services not for labour.

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.