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

[eek]

May I please ask for your insights about this scenario?

Take this supply chain looks like this:

PSC -> Agency -> Small-business consultancy -> Big-business receiving consultancy services (helping the client to migrate to the new tool)


PSC has a contract through an agency with a small-business consultancy. Due to the small size of the consultancy the changes to IR35 don't apply, and PSC will self-determine its status to be outside IR35 (contact is max 9 months, subbing is performed).

Question 1) In order to self-determine its status, is it the size of the small-business consultancy or the big-business receiving consultancy services - that matters?


Agency declares in writing that in their view the small-business consultancy is genuinely a small business - which it is in the UK. However the Company House shows that 100% shares in the small-business consultancy belong to original and bigger US-based company with pretty much the same name. PSC hasn't been able to determine the size of the parent company (the US branch might well be small or actually medium). Agent declares in writing this is not a parent-relationship and the 2 entities are not linked, hence what matters is only the size of the UK-based entity.

Question 2) Doesn't ownership of 100% shares make the US-based company with pretty much the same name - the parent? Hence should the size-test be applied to the parent as well? Or is it technically possible to have US-Based company owning all the shares and yet not be the parent or an associated company?

Question 3) If PSC accepts the contract and self-determines the role to be outside IR35 but then HMRC claims the small company exemption doesn't apply, should the US-based parent be medium, who would be liable?

Question 4) Can agency or small-business consultancy protect themselves from the wrong size determination by putting clauses in the contract that would offload the liability or costs to the PSC?

1) it depends on what the small business is doing - it may just be providing bums on seats - which means it's the end client decision. They may be delivering a project at a fixed price (including accepting all risk) which would make it their decision or it could be somewhere in the middle which would make the decision ???? responsibility - as you can see we don't know.

Some banks have however stated no PSCs under any circumstance in which case the end client is overriding the small consultancy (which in one case means we've fully walked away from a bank)..

2) Don't know

3) Welcome to why this is a mess

4) it ends up with the PSC on cases of fraud by the PSC. The PSC claiming exemption when it wasn't valid would be one reason why the risk ended back with you.

[lukas]

Small-business exemptions...

May I please ask for your insights about this scenario?

Take this supply chain looks like this:

PSC -> Agency -> Small-business consultancy -> Big-business receiving consultancy services (helping the client to migrate to the new tool)


PSC has a contract through an agency with a small-business consultancy. Due to the small size of the consultancy the changes to IR35 don't apply, and PSC will self-determine its status to be outside IR35 (contact is max 9 months, subbing is performed).

Question 1) In order to self-determine its status, is it the size of the small-business consultancy or the big-business receiving consultancy services - that matters?


Agency declares in writing that in their view the small-business consultancy is genuinely a small business - which it is in the UK. However the Company House shows that 100% shares in the small-business consultancy belong to original and bigger US-based company with pretty much the same name. PSC hasn't been able to determine the size of the parent company (the US branch might well be small or actually medium). Agent declares in writing this is not a parent-relationship and the 2 entities are not linked, hence what matters is only the size of the UK-based entity.

Question 2) Doesn't ownership of 100% shares make the US-based company with pretty much the same name - the parent? Hence should the size-test be applied to the parent as well? Or is it technically possible to have US-Based company owning all the shares and yet not be the parent or an associated company?

Question 3) If PSC accepts the contract and self-determines the role to be outside IR35 but then HMRC claims the small company exemption doesn't apply, should the US-based parent be medium, who would be liable?

Question 4) Can agency or small-business consultancy protect themselves from the wrong size determination by putting clauses in the contract that would offload the liability or costs to the PSC?

[eek]

Sorry, I introduced the MSC chat after my client raised it with me. They seem to think that if Small Consultancy in this example has everyone on payroll, it's fine. But if they engage any PSC's off-payroll then Small Consultancy becomes an MSC Provider. I think that's nonsense but looking to check others thoughts.




I'm maybe not explaining things will but there's definitely no bum on seat element. Within the project there's obviously various elements. What I'm saying is that Small Consultancy's element is under its control, and that will deliver a set number of widgets for a set price by an agreed date. The only thing the client can choose is which kind of widgets we should build and that's before we start. Nothing can changed half way through and Small Consultancy carries risk of late delivery and rewards of early delivery.

It's nonsense. The MSC rules are when a company is managing the day to day affairs of the director's business - i.e. determining dividend payments, issuing the invoices and managing the bank account that is directly paying you - however you probably can't override what someone at HMRC has incorrectly (probably intentionally) told your end customer to scare them.

Your issue is that someone has scared the end client into panicking. I really don't see how you resolve this without telling them to make a decision that you are outside otherwise you will be leaving. And HMRC want end clients to be scared - if they were thinking sanely they would be marking people as outside and saving money.

[jamesbrown]

I don't think your client understands the MSC legislation. IIRC, it applies when the day-to-day management of the company is conducted by another company in an over-arching way; this is why accountants are explicitly exempt unless they stray from normal accountancy (professional assistance and advice and completing periodic returns) to doing things like handling invoices and making decisions.

I don't think we can offer you specific advice about whether your specific supply chain involves a contracted out service. All we can convey is the consequences in each case and perhaps caution you that most supplies will not be contracted out services where the end-to-end delivery is (largely) a black-box to the client, but will involve a supply of labour to a client where the client can see what is happening, day-to-day, who is doing the work, and they have some level of oversight and collaboration.

[DrStrange]

I don't know where MSC has appeared from here - James Brown talked about medium sized companies and you took it to mean managed service companies. If you run an PSC and invoice the company no Managed Service Company exists.

Sorry, I introduced the MSC chat after my client raised it with me. They seem to think that if Small Consultancy in this example has everyone on payroll, it's fine. But if they engage any PSC's off-payroll then Small Consultancy becomes an MSC Provider. I think that's nonsense but looking to check others thoughts.

So the end client is running and managing the project -> they are the ones determining status.

There is no get out clause here - under the new rules what the end client decides is the status - and if you don't like it you can either find somewhere else and leave or stay.

And you are definitely not talking about widget delivery here you are talking about hours of time for bums on seats.

I'm maybe not explaining things will but there's definitely no bum on seat element. Within the project there's obviously various elements. What I'm saying is that Small Consultancy's element is under its control, and that will deliver a set number of widgets for a set price by an agreed date. The only thing the client can choose is which kind of widgets we should build and that's before we start. Nothing can changed half way through and Small Consultancy carries risk of late delivery and rewards of early delivery.

[eek]

Well yeah, that's how it's supposed to work but the MSC rules apply independently of IR35 and don't have the exact same requirements. I'm starting to fear they'll just use those rules to get the same net result and the second two companies link up in any way, they're facilitating the use of PSCs

I don't know where MSC has appeared from here - James Brown talked about medium sized companies and you took it to mean managed service companies. If you run an PSC and invoice the company no Managed Service Company exists.

The problem here is that it's going to be mixed project. The PM is perm at the client, some sprints are run by perms, others by contractors. In this example, Small Consultancy would manage their own one but priorities will be set by the PM.

So the end client is running and managing the project -> they are the ones determining status.

There is no get out clause here - under the new rules what the end client decides is the status - and if you don't like it you can either find somewhere else and leave or stay.

And you are definitely not talking about widget delivery here you are talking about hours of time for bums on seats.

[DrStrange]

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

Well yeah, that's how it's supposed to work but the MSC rules apply independently of IR35 and don't have the exact same requirements. I'm starting to fear they'll just use those rules to get the same net result and the second two companies link up in any way, they're facilitating the use of PSCs

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.

[/QUOTE]

The problem here is that it's going to be mixed project. The PM is perm at the client, some sprints are run by perms, others by contractors. In this example, Small Consultancy would manage their own one but priorities will be set by the PM.

[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.

[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

[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]

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...

[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?

[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.

[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..

[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?