Self-determining IR35 status post April by subcontracting from a "Small" consultancy?

[eek]

Is "contracted out service" defined anywhere?

What if the client has a few perm staff doing similar roles (albeit in a different way). Can that still be called a contracted out service?

A contracted out service isn't specifically defined but if you look at the public sector IR35 information there are examples of what a contracted out service looks like - look at the web design example.

[jamesbrown]

Is "contracted out service" defined anywhere?

What if the client has a few perm staff doing similar roles (albeit in a different way). Can that still be called a contracted out service?

Sadly not, and there will be edge cases, for sure. Just one of the many things about this legislation that makes it ill-conceived.

But, thinking about non-edge-cases, you should imagine the situation where a widget plus widget support needs to be delivered and the widget delivery and support is contracted out and the client really only sees the company that fronts the widget and widget support and doesn't care about the details of who does the grunt work on the widget and widget support. In that situation, it's contracted out, but it could still be within IR35 (if the grunt work looks like employment), only the end client is not responsible for the SDS or liable in that case.

[DrStrange]

Sadly not, and there will be edge cases, for sure. Just one of the many things about this legislation that makes it ill-conceived.

But, thinking about non-edge-cases, you should imagine the situation where a widget plus widget support needs to be delivered and the widget delivery and support is contracted out and the client really only sees the company that fronts the widget and widget support and doesn't care about the details of who does the grunt work on the widget and widget support. In that situation, it's contracted out, but it could still be within IR35 (if the grunt work looks like employment), only the end client is not responsible for the SDS or liable in that case.

So who is liable - the off-payroll Ltds?

In a case where the Big Bank hires the Small Consultancy to deliver 150 widgets pay week, and Small Consultancy engages 5 off payroll workers to deliver 30 each. If both the Big Bank and Small Consultancy agree it's a B2B relationship and the off-payroll workers are contracted to the Small Consultancy, who carries the risk if HMRC find otherwise?

My reading is that it's still the off-payroll LTDs the as the Small Consultancy, despite now being the "fee payer", is still exempt given the small company status and the Big Bank has no say in who the Small Consultancy engages

Is that right?

Or is there any way the Small Consultancy can find themselves in the dock facing a massive bill?

[eek]

So who is liable - the off-payroll Ltds?

In a case where the Big Bank hires the Small Consultancy to deliver 150 widgets pay week, and Small Consultancy engages 5 off payroll workers to deliver 30 each. If both the Big Bank and Small Consultancy agree it's a B2B relationship and the off-payroll workers are contracted to the Small Consultancy, who carries the risk if HMRC find otherwise?

My reading is that it's still the off-payroll LTDs the as the Small Consultancy, despite now being the "fee payer", is still exempt given the small company status and the Big Bank has no say in who the Small Consultancy engages

Is that right?

Or is there any way the Small Consultancy can find themselves in the dock facing a massive bill?

the question isn’t the number of widgets it’s who is financially responsible for their delivery in an acceptable format..

[jamesbrown]

Is that right?

Or is there any way the Small Consultancy can find themselves in the dock facing a massive bill?

If it's a contracted out supply of services and the client, now the consultancy, is a small client, then the responsibility and liability rests with the PSC, yes.

However, there are indeed circumstances where others in the supply chain could be responsible and liable, such as the service being a supply of labour, in fact, or the "small" client actually being a medium-sized client, in fact, or someone in the supply chain purposely disguising the facts (aka fraud).

The first step is to work out the client. The second step is to determine the size of the client. The third step is to determine the fee payer. Then the responsibility and liability becomes clear (), all subject to correct determinations and absence of fraud.

[DrStrange]

If it's a contracted out supply of services and the client, now the consultancy, is a small client, then the responsibility and liability rests with the PSC, yes.

Is there a danger the small consultancy gets caught by the managed services company rules? I.e. could it be argued that the small consultancy has become a MSC provider and so the PSCs have become MSCs?

However, there are indeed circumstances where others in the supply chain could be responsible and liable, such as the service being a supply of labour, in fact, or the "small" client actually being a medium-sized client, in fact, or someone in the supply chain purposely disguising the facts (aka fraud).

So let's say HMRC prove the supply is labour, not services. Who's liable now is the PSC can't pay? The end client (Big Bank) or the client/fee payer (Small Consultancy)?

The first step is to work out the client. The second step is to determine the size of the client. The third step is to determine the fee payer. Then the responsibility and liability becomes clear (), all subject to correct determinations and absence of fraud.

I'm not sure how this bit works if client and fee payer are the same to the PSCs?

[DrStrange]

A contracted out service isn't specifically defined but if you look at the public sector IR35 information there are examples of what a contracted out service looks like - look at the web design example.

Have those examples been removed by HMRC? I can't see them there now despite the 'change log' starting they've been added...

[jamesbrown]

Is there a danger the small consultancy gets caught by the managed services company rules? I.e. could it be argued that the small consultancy has become a MSC provider and so the PSCs have become MSCs?

I mean, yes, in the sense that there is MSC legislation and it's possible to be caught by it. If some other entity is managing and controlling the day-to-day running of the business, then it is likely a MSC.

So let's say HMRC prove the supply is labour, not services. Who's liable now is the PSC can't pay? The end client (Big Bank) or the client/fee payer (Small Consultancy)?

If there is a supply of labour to an end client, then the end client is responsible for issuing a SDS and the fee payer is liable, in the first instance. However, if the end client failed to issue an SDS (as implied by your question), then they failed in their responsibility and they become liable.

I'm not sure how this bit works if client and fee payer are the same to the PSCs?

I don't understand your question. The end client and the fee payer can be the same entity. That will happen with a direct contract, for example. If the end client is the fee payer, then they assume the responsibilities of, you guessed it, both the end client and the fee payer. Make sense?

[DrStrange]

I mean, yes, in the sense that there is MSC legislation and it's possible to be caught by it. If some other entity is managing and controlling the day-to-day running of the business, then it is likely a MSC.

If Big Bank hires Small Consultancy to deliver 100 widgets, and Small Consultancy creates 60 itself and sub-contracts 40 to Joe PSC. (Not Joe Pesci )

Small Consultancy charges Big Bank £200, pays Joe PSC £75 and so has made £125 profit.

To me, this is ok as:

• There's no relationship between Joe PSC and Big Bank,
  
• Small Consultancy is on the hook should anything go wrong or widgets are not delivered on time and,
  
• The Big Bank has engaged Small Consultancy on a genuine B2B basis, and don't care who makes the widgets so long as they get them on time and to the right standard.
  
• Small Consultancy has no say in the running of Joe PSC. It simply has offered it some work on a fixed price basis and how Joe PSC determines its taxes, corporate structure etc is up to their Directors.

So, in my opinion, until such time as Small Consultancy becomes Medium Consultancy they're exempt from the SDS, leaving Joe PSC to decide the status of its workers.

However what if HMRC, the spiteful little rogues, decide that Small Consultancy isn't a consultantcy at all, and is instead indirectly promoting or facilitating the services of an individual to a client (Big Bank) via a company (which I guess could be either Joe PSC or Small Consultancy)? Further, they can then argue that as Small Consultancy has financially benefited, that Small Consultancy is now a MSC Provider and, as such, Joe PSC is now an MSC.

What steps can Small Consultancy take to ensure this can't happen?

It seems crazy to me this is even a consideration given the original intention of the MSC rules but, upon reading the rules again tonight, I fear there's an argument to be made here?

If there is a supply of labour to an end client, then the end client is responsible for issuing a SDS and the fee payer is liable, in the first instance. However, if the end client failed to issue an SDS (as implied by your question), then they failed in their responsibility and they become liable.

So, for the avoidance of doubt, if Big Bank and Small Consultancy originally believed that the supply was for services, but that was later found by HMRC/FTT to be incorrect and that it was actually for labour, then it's Big Bank who must now cough up as they didn't provide the SDS?

Does Small Consultancy carry any risk here?


Thanks so much for taking the time to reply - it's appreciated

[eek]

If Big Bank hires Small Consultancy to deliver 100 widgets, and Small Consultancy creates 60 itself and sub-contracts 40 to Joe PSC. (Not Joe Pesci )

Small Consultancy charges Big Bank £200, pays Joe PSC £75 and so has made £125 profit.

To me, this is ok as:

• There's no relationship between Joe PSC and Big Bank,
• Small Consultancy is on the hook should anything go wrong or widgets are not delivered on time and,
• The Big Bank has engaged Small Consultancy on a genuine B2B basis, and don't care who makes the widgets so long as they get them on time and to the right standard.
• Small Consultancy has no say in the running of Joe PSC. It simply has offered it some work on a fixed price basis and how Joe PSC determines its taxes, corporate structure etc is up to their Directors.

So, in my opinion, until such time as Small Consultancy becomes Medium Consultancy they're exempt from the SDS, leaving Joe PSC to decide the status of its workers.

However what if HMRC, the spiteful little rogues, decide that Small Consultancy isn't a consultantcy at all, and is instead indirectly promoting or facilitating the services of an individual to a client (Big Bank) via a company (which I guess could be either Joe PSC or Small Consultancy)? Further, they can then argue that as Small Consultancy has financially benefited, that Small Consultancy is now a MSC Provider and, as such, Joe PSC is now an MSC.

What steps can Small Consultancy take to ensure this can't happen?

It seems crazy to me this is even a consideration given the original intention of the MSC rules but, upon reading the rules again tonight, I fear there's an argument to be made here?




So, for the avoidance of doubt, if Big Bank and Small Consultancy originally believed that the supply was for services, but that was later found by HMRC/FTT to be incorrect and that it was actually for labour, then it's Big Bank who must now cough up as they didn't provide the SDS?

Does Small Consultancy carry any risk here?


Thanks so much for taking the time to reply - it's appreciated

Once you talk about widgets successfully delivered - you are outside the IR35 rules as the risk of delivery is with the small consultancy.

To be inside the IR35 you are not talking about widgets you are talking about hours of time a bum (or bums) is sat on a seat. And then it comes down to how the work is being delivered in the eyes of the end client. Is it an external project team (with financial risk of payment attached to the external team) or is it managed internally and so the resources are simply additional labour.