HMRC 'in off-payroll rule dodge via consultancies'

HM Revenue & Customs has ducked claims that it is routing limited company IT contractors through an external company, in a bid to bypass the department’s own off-payroll rules.

Asked about private software firm RCDTS (which it owns), HMRC declined to say if it had used the commercial business more since the rules hit public sector organisations in April.

The Revenue also refused to be drawn on the nature of services it has outsourced since April, whether it has put more work via RCDTS since, or stepped up its use of other consultancies.   

Stone walling

The stone walling follows claims to ContractorUK that the Revenue has taken advantage of an exemption in the April framework for private companies that undertake public functions.

In a nutshell, the exemption applies to such consultancies as long as their contract with a public authority, like HMRC, states that it supplies ‘services,’ instead of people or labour.

In other words, a consultancy providing a “completely managed and contained service” to the likes of HMRC will be out of scope, but in scope if acting like a staffing agency, says status advisory Qdos.

While it does not mean that the PSCs provided under the ‘services’ contract are outside IR35 (indeed, the private sector’s version of IR35 is in play), it does mean the private sector provider (albeit providing a public sector function) is exempt from the off-payroll rules.

Dual exemption

The public end-client is exempt too, so -- like the provider of the PSCS -- it need not take responsibility for the IR35 status of the provided PSCs, nor potentially their tax/NI payments.

“This set-up is really common with local authorities and the NHS, [under the guise of efficiently] combining and sharing services,” said Kate Cottrell of IR35 specialists Bauer & Cottrell. 

“A council set up a company to run the IT services and then sold them to other councils. Interestingly, the new company was staffed by the council’s previous [IT] people.”  

Services ‘and’ People

Cottrell has already outlined how gauging if consultancies are caught by the April rules is complicated where both services and people are provided.

“[Then], it will be necessary to have sight of the wording of the contract between the consultancy and the [public authority],” she has explained.

“It will usually also be necessary to review the procurement terms and processes such as, which framework the contract was secured under.”

A cautious, contractual emphasis was sounded last night by Qdos. “If it is done properly, then [the client and its former PSCs via a consultancy] may be perfectly fine,” it said.

Same workers, different source

At HMRC, there was no official word yesterday on whether PSCs who worked for HMRC before April quit, only to return to HMRC projects or services via a company, like RCDTS.

Posed numerous queries about its use of consultancies, a HMRC spokesman would only say: “As taxpayers would rightly expect, HMRC is holding anyone who works for it to the rules.

“We have the largest digital operation in government and resource levels are not static. We look at the facts of each individual engagement to determine correct employment status.”

Qdos says that “a complete change in the working arrangements” of PSCs who leave a public body, only to resume their work for it via an external, private business, would need to occur.

Contractors offering ‘Consultancy Services’

However, the status advisory appeared to be talking about best-practice to achieve total compliance and avoid any trouble with HMRC, in the event that the Revenue investigated.

Or at least, this is the suggestion of an ex-tax inspector who said: “This exemption [in the legislation] has incentivised a lot of contractors to band together to offer ‘Consultancy Services’ while doing exactly the same [tasks and work] as they were before.”

Both parties were more agreed about the role of HMRC. “There are many grey areas, particularly in the absence of any clear material from the Revenue,” said Qdos CEO Seb Maley.

Pointing a similarly accusatory finger at his old employer, the inspector said: “This is all part of the current mess. Take Group 4. They provide all the cleaners to clean the prisons. 

“It’ll no doubt seem unfair to contractors who’ve decided to quit or become umbrellas, but the new [off-payroll] rules do not apply to Group 4 because they are providing ‘cleaning services.’”

Revenue not realising (cont)

The inspector said that the tax authority does “not fully appreciate all the different scenarios” covered by the exemption.

But equally, he says “a lot of people seem to have been in the right place at the right time and won the contracts,” and that it “takes a lot of unravelling for HMRC to do.”

Master plan

Another ex-Revenue official, now an accountant and umbrella company boss also sounded supportive of HMRC -- seemingly because it seems to be sticking to its ‘master plan.’

“Although they handled the [IR35] reform badly, the ultimate aim [of HMRC] is for genuinely self-employed contractors to gain access to contracts of work direct”.

Elaborating on her view, ex-Revenue Carolyn Walsh, of Andraste Accounting and CWC Solutions, said the off-payroll rules would likely result in “workers who actually have no interest in running their own company being paid under PAYE.”

'Middle men’

Whether paid directly or via agency or umbrella PAYE, these contractors will be clearly differentiated from contractors which the ESS deems genuinely self-employed, she said.

“We could be seeing the start of the middle-men being cut out,” the ex-inspector added. “They had a good run we’ll all say, and they won’t like it but the middle-men might be on the way out in the private sector too [if HMRC gets to fully execute its plan].”

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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