Contracting for a client who’s still banning limited company, off-payroll workers: 4) Exemptions

Last is unfortunately least because our source’s final query about how a financial services outfit is treating its external suppliers leaves not an awful lot to say. And certainly not a lot to say that’s awfully positive for the bank’s consultancies being forced to reflect its PSC ban.

The objection is that these consultancies are small and so should be excluded from the off-payroll legislation scheduled for April 2021, because it contains an exemption for small companies, writes Carla Roberts, director of legal services at WTT Legal.

So because these consultancies meet the ‘small’ criteria, surely the bank’s decision to respond to the 2021 framework by asking these consultancies to ban PSCs when supplying the bank (in line with the bank’s own hiring ban on PSCs), is illegal? Or surely, our complainant further insists, it breaches the spirit of the off-payroll rule exemption?  

The small company exemption: what the legislation says

Well, maybe the latter (at a push), but not the former. The legal position is that if a consultancy arrangement is involved in the supply chain, the consultancy, as the supplier of contracted-out services, becomes the ‘client’ for the purposes of the incoming off-payroll rules and carries the tax liability. 

In these circumstances, the company receiving the services from the PSC contractor (the ‘end-user’ and here, our bank) is no longer classed as the client, so it would not carry any tax liability.

And because the new rules apply only to medium and large businesses, small consultancies are exempt. The effect of this is that the ‘old’ IR35 rules (introduced in 2000) will still apply – meaning that any PSC contractors working through such consultancies need to continue to self-assess their IR35 status.  

In the absence of clear, prominent HMRC guidance on ‘contracted out’…

Regardless, some companies (including our bank) are ignoring that exemption or have taken a very risk-averse approach by banning PSCs anywhere in the supply chain, even where exemptions exist.

This could be because HMRC’s guidance relating to ‘contracted-out services’ is very difficult to find. To save you the difficulty, the guidance is here.

Until this guidance is clarified, some end-users unable to locate HMRC’s endorsement of the consultancy model, have continued to ban PSCs or look instead to the expensive comfort offered by the larger consultancy firms. While this seems illogical or at least, an unnecessary over-reaction, this is technically not “illegal”. Companies are entitled to contract with whoever they wish in a B-2-B relationship.

Therefore, if end-users wish to ban PSCs anywhere in the supply chain, there is nothing stopping them from doing so in this scenario, especially since the end-user usually ‘holds all the cards’ when negotiating the contractual arrangement.

For those parties currently being ‘trumped,’ it’s worth pointing out that we have been awaiting on an update to the HMRC employment status manual. A draft version has now been published which does provide further clarification and importantly, specific examples of a fully “contracted-out service”. Once we have the final version, hopefully end-clients will have the reassurance they require to understand that this model, operated compliantly, is outside the scope of the legislation.

The outlook

It is our view that supply chains will adapt over time, especially when more guidance and reassurance is available from HMRC relating to consultancies, but long-term change will have hit the sector already.

Standing back from the detail of the exemptions for both small companies and contracted-out services (a person who receives a fully contracted out service does not need to apply the off-payroll legislation), it is clear that our bank, or indeed any other client who takes a knee-jerk reaction to the incoming legislation, will find themselves experiencing a skills shortage, almost inevitably.

This dearth of talent will be even more of an issue once things resume to normal after the economic pressures of the covd-19 pandemic subsides, and hiring starts again. We think that the government’s one-year reprieve for the contractor sector which widely opposes the IR35 reforms, may give those clients an opportunity to re-think their policies, understand the legislation and feel confident engaging with consultancies that are delivering a genuine outsourced service which includes PSC sub-contractors.

Friday 29th May 2020
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Written by Carla Roberts

Carla Roberts is a dual-qualified (UK/US) lawyer with extensive experience in the staffing and insurance industries. Her expertise is in IR35 legislation, commercial contracts, insolvency, professional negligence, employment and regulatory law, risk management, insurance and compliance. She attended UCLA (undergraduate), Southwestern College of Law (Los Angeles) and College of Law (London).

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