Understanding Contracted Out Services and IR35 Compliance

In the ever-evolving landscape of worker classification  and taxation, it's crucial for businesses and contractors to stay informed about the latest regulations, such as IR35, which was introduced to combat tax avoidance by contractors who work through intermediaries, such as  Personal Service Companies (PSCs), ensuring they pay the appropriate amount of income tax and National Insurance Contributions (NICs) when working in a manner similar to employees. 

In this blog post, we'll delve into the concept of contracted out services and how can add an extra layer of complexity to IR35 compliance.

What are Contracted Out Services?

Contracted out services refer to the practice of engaging service providers to perform specific services or projects for a company, rather than the company engaging resources itself. This arrangement allows businesses to access populations specialised skills and resources  on a flexible basis, without the long-term commitment and overhead costs associated with traditional employment.

In such a case the company is contracting with another organisation, to obtain specific services, and it is the other organisation (service provider) who will ensure that the resource requirements of the services are met (i.e. ensure an adequate number of people and expertise are appointed to fulfil the service requirements.  

Determining IR35 Status:

In a true contracted out services engagement, it will be the appointed service provider who is responsible for determining if an IR35 assessment is required and then conducting that IR35 assessment. This is because the company is engaging the services of another business entity. The service provider and any personnel who are involved in delivering the services are answerable to the service provider, not the company. 

Whether a service is fully contracted out is based upon the commercial reality of the arrangements, rather than what’s written in the contract. 

When determining the IR35 status of the workers involved in performing the services all the key IR35 factors must be considered including control, substitution, mutuality of obligation and financial risk. If the working relationship between the worker and the service provider and/or company resembles that of an employer-employee relationship, the contract will fall within IR35, and the service provider will be required to ensure that income tax and NICs are applied to payments

Implications for Businesses:

For businesses that engage contracted out services, it's crucial to ensure compliance with IR35 regulations. In presuming that the service provider is responsible for ensuring IR35 compliance, as a contract is structured as a fully outsourced service, this can result in significant financial penalties and reputational damage. Businesses should conduct thorough audits and the necessary assessments maintaining a clear documented record of all steps taken, and seek professional advice when required. .

Best Practices for IR35 Compliance:

1. Conduct thorough review of contacts and working practices  assessments for each contracted out service engagement in order to ensure it does constitute a true ‘contracted out’ service engagement. 

2. Ensure conformity between contracts and working practices 

3. Request an input into the IR35 assessment and/or a copy of the SDS Maintain accurate records and documentation of assessments and decisions

4. Stay informed about the latest IR35 guidance and legislative updates

Cocomply's comprehensive IR35 compliance solution can help you streamline these best practices, identifying the correct end-hirer, providing accurate assessments, expert guidance, and a centralised platform for managing contractor relationships. With Cocomply, you can confidently engage contractors while minimising the risks associated with IR35 non-compliance.

Don't let IR35 concerns hold your business back, and get started on your journey to IR35 compliance success.