IR35: HMRC commits to improving ‘contracted out’ guidance for off-payroll rules

Seven contractor recruitment agencies have met with the taxman to tell him his ‘contracted-out’ guidance for IR35 off-payroll compliance still isn’t up to scratch.

The inadequacy of the guidance was first flagged up before April 6th’s 2017 off-payroll rules even took effect, when Bauer & Cottrell warned that HMRC’s case study was not clearcut.

WTT Consulting has similarly criticised the Revenue, saying its stance on contracted-out services (known as Statement of Works, ‘SOWs’), is both unclear and hard to locate.

And ReLegal Consulting pointed out in May this year that HMRC had upped its “communications” about contracted-out services, “in response to customer insight”.

But only a few months later, in August 2023, some contracted-out arrangements seeking to bypass the off-payroll rules were said to adhere to HMRC guidance so poorly that the guidance may as well not exist.

'Explored'

At last week’s meeting with HMRC (which was represented by five tax officials from its policy and compliance units), the use of SOWs as a workaround to the rules was, “explored”.

Recalling yesterday what was said, Stephen Rookes, an adviser to The Association of Professional Staffing Companies (APSCo) also told ContractorUK:

“I explained to HMRC that I had seen a number of contracts with recruitment agencies that purported to be ‘contracted-out services.’

“But on closer examination, they clearly were not genuine [SOWs], as they did [not] satisfy the fundamental principles set out in HMRC's Employment Status Manual.”

'HMRC to enhance contracted-out off-payroll guidance to make it clearer'

Rookes says HMRC committed to look at “enhancing” its existing guidance to “make it clearer” what does and does not constitute a genuine contracted-out service. 

The tax department also said it was committed to ‘taking on board the observations’ of the seven agencies.

Qdos, which was in attendance too, cautions that the taxman wasn’t put on a deadline however, regarding his commitment to improve the Statement of Work guidance.

In fact, the IR35 contract review firm’s CEO, Seb Maley, says he left the meeting “not clear about the timings of any changes” to the currently live HMRC guidance.

'No vow to improve contracted-out IR35 guidance by Autumn Statement 2023'

Rookes agrees. “There was no comment or commitment [by HMRC] to make any improvements at Autumn Statement 2023,” he said, responding to questions. “That’s highly unlikely and optimistic.”

Equally optimistic is to try to make the ‘contracted-out’ label stick, when a recruitment agency follows a service provider in the supply chain.

The managing director of his own consultancy, Strategic Risk & Compliance Consultancy Ltd, Rookes explained his assessment:

“While there may be a genuine contracted-out service between a client and service provider, for example an IT consultancy, when an employment business is the next supplier in the supply chain, it is very unlikely that the service provided by the employment business to the service provider…[will] meet the [HMRC] principles of a contracted-out service.”

He added that it’s particularly likely to be a contracted out-fail, on the basis that the workers provided by the employment business would likely be “integrated” into the service provider's (or client's) project delivery team.

'Develop HMRC's understanding of contracted out services'

Due to the complexities at stake, APSCo says it is pleased to have been able to meet HMRC – which itself is apparently still on learning curve when it comes to contracted-out services.

“HMRC welcomed [our] insights…to further develop their understanding of the use of contracted out services, including the risks and issue involved,” APSCo’s general counsel Shazia Imtiaz told ContractorUK.

Imtiaz added in a statement yesterday: “HMRC was also keen to receive feedback on its existing guidance, especially areas that should be included or do not currently add value to the guidance.

“APSCo understands that HMRC will use the views shared at the roundtables to help shape any draft guidance, and circulate to interested parties and stakeholders for review and feedback.”

'Very difficult consideration'

But an all-new draft of HMRC guidance on contracted-out services -- even one approved by the contractor industry, still won’t provide a substitute for what judges make of it all. 

“In the absence of any case law, it’s a very difficult consideration for contractors’ clients; particularly given the complexity of projects and the volume of suppliers,” Qdos’s Mr Maley said of contracted out services.

“The current [HMRC] guidance leaves a large grey area which forces clients to make decisions based, in some cases, on common sense. [Nonetheless]…the fact that HMRC is actively looking at the area in isolation is something to be positive about.”