Reply to: Tax - Inside or Outside

[jamesbrown]

How do fully contracted out services fit into this?

All it changes is the nature of the supply chain and where the responsibility and liability falls under Chapter 10. It doesn't materially change things for YourCo as the entity at the end of the chain. For example, it doesn't make the contract "outside IR35" or remove the responsibility or liability of the supply chain to operate Chapter 10 correctly.

There is always an end client. Sometimes, there is a Fee Payer, other than the end client.

Let's assume that Company X fully contracts out a service and that service is delivered by Company Y, meaning that Company Y provides a service to Company X at arms length and does not provide a supply of labour to Company X.

Let's further assume that Company Y contracts with Company Z (YourCo) to help deliver that service.

In that situation, the client of YourCo for the purposes of Chapter 10 is Company Y and Company Y will be responsible for the SDS. If there is a Fee Payer, such as an agency, between YourCo and Company Y, then the Fee Payer would be liable in the first instance, otherwise Company Y.

[hobnob]

Honestly, avoid Chapter 10 outside contracts because the risks are greater than any risks associated with outside contracts prior to April 2021 (Chapter 8 and public sector reforms) and you also have less control.

How do fully contracted out services fit into this? Looking at ESM10010:
ESM10010 - Employment Status Manual - HMRC internal manual - GOV.UK (www.gov.uk)

Where a person enters into a contract for a fully contracted out service, they will not be the client. This is because the worker’s true client is the party who the work has been contracted out to; the ‘service provider’. The service provider is the party most akin to the worker’s employer. The person receiving the fully contracted out service has not meaningfully entered into a contract for the supply of the worker.

A person who receives a fully contracted out service does not need to apply the off-payroll working legislation, as they will be above the client in the contractual chain and will have no obligations under Chapter 10, Part 2 ITEPA 2003 in relation to that contract. The service provider providing the fully contracted out service must consider if it is a public authority or medium or large-sized entity to see if it is within scope of the off-payroll working rules.

E.g. suppose that company X wants to get certified in Cyber Essentials. They go to IASME's website and look through the list of approved companies, and see MyCo on the list. As I understand it:
* There's no SDS from company X to me, regardless of their size, because MyCo is the service provider.
* There's no SDS from MyCo to me, because MyCo is a small company and therefore exempt.
* So, there's no SDS at all, just a scope of work.

The alternative would be:
* Company X comes to MyCo.
* I disclose to Company X that MyCo is a PSC (because I have a material interest), so they'll need to fill in an SDS.
* Company X takes their business elsewhere, so that they can skip the paperwork.

I know that this is an edge case, compared to what most people here do, and arguably it doesn't count as contracting at all. However, the risks seem fairly low, because MyCo's client never gets a vote, so I don't have to worry about them changing their mind later (e.g. during an HMRC investigation).

[MrC]

I'm not joking when I say that if you want a risk free live take the better paying inside contract and throw things into your pension.

Yes and it seems to me that many inside roles are paying enough extra to make the renumeration as close as makes little difference.

Of course adopting this mentality means that after decades of back n forth HMRC have now all but won the IR35 war

[MrC]

I'm surprised you've only just discovered it. It's been delayed twice and the application of it to the Public Sector was a couple of years in the making before that as well. If you've only been out even 2 years you should have been well aware it was coming.

It looks like you haven't taken your meds again NL.... I didn't say the intro of the spring 2021 change to who determines the status was news. It's the realisation that from a grey muddle before we now have a highly taxed cohort and yet another grey muddle but with new threats, risks and unknowns. Sucks.

[cojak]

Well, I can write something from the combined posts of you and JB here, then you and he can edit it and I’ll update.

[eek]

Well, I’m going to unstick this thread https://forums.contractoruk.com/acco...ould-i-go.html because it is now out of date.

So we need a replacement.

PS. Not necessarily written by me, btw…

Nor me - I remember the response the last time I did that even though everything I said would happen played out as I expected.

[cojak]

Well, I’m going to unstick this thread https://forums.contractoruk.com/acco...ould-i-go.html because it is now out of date.

So we need a replacement.

PS. Not necessarily written by me, btw…

[jamesbrown]

So, eek, paralytic, jamesbrown, we are in a position to warn people before HMRC start sending out brown envelopes in 1 - 3 years time.

What do we tell them (apart from save ALL your documentation because you are going to need it)?

Honestly, avoid Chapter 10 outside contracts because the risks are greater than any risks associated with outside contracts prior to April 2021 (Chapter 8 and public sector reforms) and you also have less control. I appreciate that is tough advice, but it's advice I am following personally. Stick with inside IR35 contracts via an umbrella, employment contracts, and Chapter 8 outside contracts (i.e., small clients and fully overseas supply chains).

If you must take Chapter 10 outside contracts, then there are some things you can do to mitigate. Absent fraud, the risk is not primarily from HMRC/brown envelopes in this situation, rather from the supply chain itself and from claw back clauses in contracts.

Thus: 1) avoid any possibility of being accused of fraudulent behaviour; in other words, respond to all questions from the supply chain w/r to the SDS process (if any) and retain that correspondence and ensure that you retain the SDS; 2) document your working practices, as you would with Chapter 8 contracts (this may help when a client or fee payer attempts to rewrite history); 3) avoid very long contracts; 4) look for short payment terms (so there is little outstanding at any given time from which they can withhold money); 5) over a longer period, consider closing your company to mitigate risk (but do not do this for tax avoidance purposes); and, most importantly, 6) avoid contracts with claw back clauses, because there is a non-trivial chance they will succeed (e.g., there are parallels in PAYE employment that succeed).

[simes]

Good catch I completely forgot that was how the agency played the game with you...

But that still leaves the agency paying the Employer NI, Employee NI and the initial 20% tax and that may or may not be possible depending on the size of the bill and the size of the agency.

Bearing in mind this is all currently mostly speculative, if the agency comes a calling, post an HMRC missive, does this, could this, would this put the contractor in a position to maintain their IPSE/Qdos Insurance to fight, if not the HMRC this time, but the agency? Or the HMRC and the agency together? Or would the contractor just have to roll over in ways not similar to pre 2017/2021 when such insurance could fund a fight?

[cojak]

Well, I’m not sure what documentation apart from the contract TBH. I was just frustrated that many in HMRC Enquiries were coming to us with no documentation whatsoever.

[eek]

So, eek, paralytic, jamesbrown, we are in a position to warn people before HMRC start sending out brown envelopes in 1 - 3 years time.

What do we tell them (apart from save ALL your documentation because you are going to need it)?

I will post a longer reply at some point but What documentation?

The issue is that it's now completely outside your control - you have a contract that says you are outside IR35 and an SDS determination that says the same. You then have multiple scenarios that result in the contract being treated as inside IR35 and multiple outcomes from those scenarios.

I'm not joking when I say that if you want a risk free live take the better paying inside contract and throw things into your pension.

[Fred Bloggs]

We (well I) have had confirmation from HMRC.

It went if a contract starts out as outside IR35 (with an SDS) and is appealed to become an inside IR35 contract (don't ask how that appeal occurs for it makes zero sense) the tax has to be paid. And the suggestion from HMRC was that the fee payer should reclaim the money from the contractor.

Oh my. That's not how the new IR35 regime was intended to work. Is it? Under those circumstances, then all you can do to prevent risk is to down tools and quit the job immediately the second the agency notifies you of the switch to inside IR35?

[cojak]

So, eek, paralytic, jamesbrown, we are in a position to warn people before HMRC start sending out brown envelopes in 1 - 3 years time.

What do we tell them (apart from save ALL your documentation because you are going to need it)?

[Keanu2020]

Being honest, I thought that once outside decision was made, you would kind of be left alone as risk transferred to fee payer (and hence the wave of blanket inside determinations). But actually it seems worse. The risk of a later investigation and tax bill is still there, the fee payer can transfer the tax debt to you, HMRC may chase you for it direct in some circumstance, but other options are removed as well.

I may have this wrong, but how do we now fight a HMRC investigation and status change? In the past HMRC would open an enquiry into the ltd and you could fight it. Now your not in the loop at all and can’t challenge or be involved in the decision (HMRC tells fee payer what the answer is). I can see Courts not wanting to unwind a tax determination made elsewhere between fee payer and HMRC, and when fee payer or HMRC chase you for the tax, the decision (inside) is already a fait accompli, hell, you might not even know anything changed retrospectivly until a bill arrives.

It is why I keep wondering if there is not something we as a community can do to get clarity on how it works so people are sighted on the risk and potentially challenge the position. I hear NLUK and others point about this has been coming but I’m not sure any of fully understood the exact shape of it that is now appearing.

[northernladuk]

Having not really been in the loop with all of this for a year or 2 and now just dipping back in I am totally shocked and dissapointed to discover the the steamrollering of IR35 to the majority of contracts has not even left a silver lining that many were talking of a year or so back where those with outside determinations could just get on (hard working contractor *insert emotive adjective here* families) with their work without the constant threat of retrospective tax action.

F**kiing shocking!

I'm surprised you've only just discovered it. It's been delayed twice and the application of it to the Public Sector was a couple of years in the making before that as well. If you've only been out even 2 years you should have been well aware it was coming.