Carousel_Arrow Chat icon_cookie IHT_trust_wills IR35 Combined Shape 2 Group 10 Login Mobile Menu Share Share Email SubMenuMobile Group 9 VAT View_Gallery View_List capital_allow Triangle 2 Copy Close construction cyberpro employment_tax_shares emplyer_solutions entrepreneurs_corps fee_protect Group 7 grant_fund Group i_Clock i_Consult i_Done i_Eligibility_Tick i_Enter i_Filter i_HMRC i_Negative i_Play i_Plus i_Reset i_Support_Legal i_Support_TaxDesk i_Support_VAT i_Tick noun_marketing_1872083 noun_online_2126759 i_download i_meet Group Copy 24 Group 18 noun_electrical_1240755 copy noun_Technology_2125422 noun_Science_2031115 i_tick_bullet_block international_tax patent_box private_client property_sdlt r_and_d reliefs_incentives Search specialist_tax status tax_indemnity valuation
Markel Tax

19 Nov 2019

Outsourced or not?

As we all know, the private sector legislation states that where an end-client who is in receipt of a PSCs services does not fall within the small companies definition then that end-client is the “decision maker” with responsibility for determining whether IR35 applies to any PSCs and to produce a Status Determination Statement (SDS) and pass this down to the PSC and the next party in the contractual chain (typically an agency).

In turn, once a decision has been made, responsibility falls to the intermediary which has the contract with the PSC (assuming all parties have passed down the SDS) as “fee payer” to ensure that the correct payment is being made to the PSC.
 
Where the end client organisation engages the services of an outsourced service provider, as opposed to an agency, then the legislation does not apply to the end-client organisation.  There is an important distinction between an agency and an outsourced provider.
 
An agency engages with a client to provide them with a PSC to provide services, for example a company may need an IT contractor so it offers out to agencies its need for an experienced IT contractor for a temporary assignment and the agency finds a suitable PSC candidate and provides it
to the Company.
 
An outsourced service provider engages with a client to provide services outright. For example a
company may decide it wants to outsource the entirety of its IT services to a third party company and
that third party company enters into a commercial contract to take on and deliver those services
itself.
 
The distinction is that an agency provides PSCs to clients and the client is in receipt of the PSCs services, whereas the outsourced service provider accepts the contract (including all commercial risks and responsibilities) itself to provide the services and simply subcontracts part of those services to a PSC.
 
The reason this distinction is so important in respect of the new IR35 legislation is because where
there is an agency in the chain then the end client is “decision maker” with all the associated burdens and responsibilities.  Where the end-client has engaged with an outsourced service provider, that end-client is no longer the “decision maker” for the purposes of the legislation (because it has outsourced the entirety of the particular functions/services to a third party).  Whether the new legislation has to be considered now falls with the outsourced service provider.  If the outsourced service provider does not fall within the small companies exemption then it will be the decision maker and fee payer for the purposes of the legislation, if it does fall within the exemption then the decision in respect of IR35 stays with the PSC.
 
While it is accepted that an outsourced provision of services breaks the chain between the PSC and
the end-client organisation, it only works successfully where the outsourced service provider is operating correctly. As such it must be seen throughout the contractual chain (from the top of the chain down to the PSC) that the outsourced service provider is responsible for the provision of services and operates independently of the end client.
 
HMRC will scrutinise the relationship between all parties to determine whether the outsourced provider is a genuine provider of services or whether it is more akin to an agency (and will likely be quick to place burden back on the end-client organisation if they find it is more akin to an agency provision).  Some areas which may give rise to HMRC questions are:
 
- where a PSC or individual is named in the contract between the outsourced provider and the client;
- where invoices show the name of an individual or PSC;
- where the end client has the right to interview or “vet” a particular PSC
- where the end client can specify particular individuals or PSCs;
- where the contract going down the chain to the PSC references the end-client organisation as “the client”
 
Since the announcement of the legislation there has been a rise in the number of outsourced providers or “managed service providers” coming to the market.  It is important for those providers (and agencies and end-client organisations alike) to be certain that there is a genuine outsourced service which can be demonstrated fully in the contractual chain and working practices.
 
If you would like to speak to one of our specialist team please contact us on 03450 660035 or email us at IR35@markel.com
 
Tagged IR35
Next article in series

19 Nov 2019

IR35 in the Private Sector: Protecting 'fee payers'

Whilst we wait for the election to unfold and then hopefully a government to be formed and then early in the new year a budget, forward thinking agencies who will be fee payers in this new regime and some end clients who engage directly, are worried about the implications of getting the decision wrong.