Non-Payroll (IR35) – How to Hire Effectively Using Outsourced Services

Since the entry into force of the non-wage legislation in April 2017, presented as a reform of IR35, there has been a proliferation of consulting firms offering services to clients. But, all parts of the supply chain need to ensure that the board is truly a fully outsourced field service, or else they could find themselves subject to significant future tax bills, says Martyn Valentine, founder of The Law Place, which has provided legal advice and guidance on IR35 matters for over a decade.

“HM Revenue & Customs published guidelines in ESM 10010, which raises more questions than answers,” explains Valentine, who explains that the legal position remains unchanged. “In the guidelines, the HMRC describes the law (section 61N (1) (a) of the Income Tax (Earnings and Pensions) Act 2003) which designates the client as’ the highest person in the chain ‘for which the worker provides his services, but fails to provide the clarity we so badly need.

This issue continues to cause confusion and concern, as a client seeking IT services, for example, may rely on potentially false claims from a consulting firm that there is no need to proceed. to status determination statements under the paid vacation legislation because the consulting firm claims it is the client, not the client. There is nothing in the paid vacation legislation to protect them if they make this wrong decision – potentially making them liable for any future tax bills if HMRC disagrees and issues notices of determination that commitments are taken into account in IR35.

On the other hand, if they are right and a consulting firm is actually providing a fully outsourced service to its client, then the consulting firm is the client for the purposes of the off-payroll.

Beware of body shops pretending to be consultants

Some consulting firms have sought to provide their clients with a tax-advantaged service by relying on the small business exemption to entirely bypass the requirement to undertake tax status and risk determinations.

However, HMRC can challenge the good faith of such an arrangement with potentially ruinous consequences for both the consulting firm and its client. Valentine explains that “HMRC will look at the central issue of customer capacity; is the client getting a fully outsourced service from the consulting firm or is it just hiring workers? ”

This is the same question at the heart of the original IR35 legislation. The investigative process will involve a review of contracts, but, as Valentine explains, “HM Revenue & Customs cannot ‘do violence’ to contracts in the same way as an IR35 investigation and override a legally binding contract. Demonstrating that a contract is a sham is obviously difficult but not impossible. ”

If the outcome of the investigation is that the consulting firm is not the contractor’s client, the client will be deemed to be the client for Out-of-Pay purposes if its true capacity is simply to hire a worker. individual. The consulting firm will by default be the “fee payer,” responsible for any underpayment of taxes, but if no status determination statement has been provided to it, its client will become fully liable instead.

What are the pitfalls to avoid ?

Valentine cautions against poorly drafted contracts. “We have seen a lot of poorly drafted contracts that are nothing more than vanilla recruitment contracts where the word ‘agency’ has been replaced by ‘consultancy’. A consultancy contract is radically different from a reconverted recruitment contract and will define the consultancy obligation as the provision of an agreed service consisting of identifiable and measurable results. Suffice to say that the recruitment process is totally different from the provision of an outsourced service.

Another flawed approach is what Valentine calls a “disguised agency”. This is where the obligation of the consulting firm is to recruit someone to fill a role instead of providing a fully outsourced service. Valentine says that “a consulting firm risks being liable for a violation of the Conduct of Employment Agencies and Employment Regulations 2003 if its true obligation is to provide individual workers.

Poorly-worded statements of work are also common, explains Valentine, who explains the problems he has seen: “The term ‘statement of work’ has been used as snake oil or an ‘incredible find’ in an advert. – late night reporting for years. Just adding a few bullet points to the service description instead of a job title offers no protection for the consultant or client. More often than not, statements of work are nothing more than job descriptions with the inherent risk of the client being seen as the client. If the statement of work looks like a requirement for an individual rather than a service, then the work is not a contracted service.

Oddly, Valentine even saw cases where there was no contract. “HMRC has the power to review all contractual documents of a transaction. A contract between a consulting firm and a contractor may indicate that it is not IR35 compliant and define specific deliverables, but the consulting firm may have failed to provide an equivalent contract to its client. The right way, as Valentine explains, is for the consulting firm to have a solid contract in place with each contractor and a mirror contract with each client. Sometimes clients insist on using their own terms. In this case, a consulting firm should seek independent legal advice regarding the risks involved.

What are the best practices for hiring off-payroll consultants?

Valentine defines a five-point plan that consultants must follow and reassure their clients:

Step 1 – Confirmation letter so small: If applicable, certify to its clients that it is small in size and provide confirmation that a client size confirmation letter “section 60H” has been issued to all contractors using businesses.

Step 2 – use ratings or insurance: Provide status determination statements or tax assurance letters to clients. While a small client is outside the scope of the payroll, a consulting firm client will be reassured to receive a status determination statement or tax letter of assurance in respect of each entrepreneur using a limited liability company. The key point is that a status determination statement or tax insurance letter will provide proof that reasonable precautions have been taken.

Step 3 – Use the guarantees: A consulting firm can insert a guarantee into the contract with its client to confirm that all contractors using companies will get legal advice on the status of an engagement. Legal advice can only be credible if the adviser is sufficiently competent and experienced to advise.

Step 4 – Skip CEST: Do not trust the CEST, which is imperfect and which does not take into account the nature of the services to be provided and, which cannot indicate whether a service is entirely outsourced. Substitution can be ignored if the customer’s requirement is for a specific person and not a specific service. CEST is not legally binding and HMRC will ignore it.

Step 5 – seek advice: Seek competent and impartial legal advice – a specialist lawyer insured to provide employment status advice can draft a set of contracts for use by a consulting firm and provide ongoing support to ensure that the work reflects a fully outsourced service.

Martyn Valentine is Founder and Director of The Law Place, which has provided advice and guidance on IR35 and non-payment issues for over 15 years. He currently assists a multitude of end customers and contractors to ensure that their contracts are legally sound and fair to all parties.

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