ESM10010 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: contracted-out services
The off-payroll working rules place obligations on the worker’s client. The client is the person who the worker performs services for. In most cases it will be obvious who the client is. Where there is uncertainty as to who the true client is, consideration should be given to the nature of the relevant contracts and working practices.
Where a person enters into a contract with an intermediary for the supply of a worker, they will be the client, unless they are an intermediary themselves. For example, where an employment agency sources a worker through another employment agency, it will be an intermediary.
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.
Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements. Care should be taken to ensure that a labour supply contract has not simply been re-labelled as a managed service. For example, labelling a contract as a contracted out service or a ‘statement of work’ when in reality the contract contains a provision for labour will not prevent the off-payroll working rules from applying, and the reality of the arrangements should be considered.
Relevant factors will include, but are not limited to:
1. The nature of the businesses
Where the type of service provided by the worker aligns closely with the nature of a business (or a department within a business), this will be an indicator that the business is the client. For example, a cook working for a catering firm.
2. The nature of the service provider’s contract
Where a service has been fully contracted out, the service provider will usually have responsibility for agreeing the specification of the service and ensuring the quality of the service. A fully contracted out service will often involve the provision of goods and materials, as well as labour.
A service provider will usually have an opportunity for profit, beyond taking a percentage of the worker’s fee, where a service is fully contracted out.
3. The relationship between the worker, the service provider and their customer
Consideration should be given to who the worker personally provides their services to. This is likely to be the person most akin to the worker’s employer. The extent to which the service provider or their customer control the worker, benefit from the provision of their services, bear risk, and integrate the worker into their business will all be relevant.
When having regard to the factors, the actual working practices must be taken into account as well as contractual terms. Contractual terms alone will not decide the matter, they must also be followed in practice to have weight in making a decision.
Note - The Contracted Out Services chapter of the VAT Manual (VATGPB9000) is not relevant to the off-payroll working legislation.
Examples
1 – Outside the scope of the legislation
Gym Supplies Ltd, a large-sized business, contracts with Payroll PLC, who are also large-sized, to build and deliver a payroll computer system and provide online access to an agreed standard for £10 million per year for two years. The number of workers needed to deliver the project, their cost and the risks are determined and borne by Payroll PLC, and Gym Supplies Ltd are not sent workers. Workers provide their services through PSCs. Gym Supplies Ltd is not aware of how many workers Payroll PLC engages and that is not part of the contract.
From time to time, Payroll PLC’s workers need to discuss changes to the system and these people are given security passes, but they only report to Payroll PLC and carry out tasks for it and not for Gym Supplies Ltd.
In this example, Gym Supplies Ltd has contracted out a whole service. Workers are not personally providing their services to Gym Supplies Ltd. Payroll PLC has responsibility for delivering the project and controls the work performed by the workers. Payroll PLC is the party most akin to the employer. Payroll PLC is directly benefitting from the workers’ labour. Gym Supplies Ltd is benefitting from the provision of a service provided by Payroll PLC. Payroll PLC will need to determine the status of the workers, issue a status determination statement (SDS) to the workers and is responsible for PAYE if the engagements are determined to be inside the rules.
2 – Within the scope of the legislation
Golf Academy Ltd, a medium-sized company, requires some advice on how best to design a new HR system to integrate with an existing system. Individuals will work mainly at Golf Academy Ltd’s office and be managed by, and take instructions from, Golf Academy Ltd’s implementation project manager. X-Resourcing Ltd supplies fifteen consultants for the duration of the project who work through their own PSCs. Golf Academy Ltd has no influence over which workers are sent by X-Resourcing Ltd and don’t know who these workers are prior to the start of the project.
The workers report, and personally provide their services, to Golf Academy Ltd. The project is managed by Golf Academy Ltd and they retain responsibility for it. Golf Academy Ltd is most akin to the employer. Irrespective of Golf Academy Ltd not knowing who the workers were prior to the start of the project, it is benefitting from the provision of the labour rather than the provision of a service. Golf Academy Ltd should issue a SDS to each of the workers prior to the first payment. In order to ensure it has discharged its responsibilities, Golf Academy Ltd should also provide a SDS for each worker to X-Resourcing Ltd as the party it contracts with. Once X-Resourcing Ltd is given a SDS for a worker by Golf Academy Ltd, as the party paying the worker’s PSC and having been given the SDS, X-Resourcing Ltd will be the deemed employer and fee-payer and is responsible for the deduction of tax and NICs, and the payment of the apprenticeship levy and paying these to HMRC.
3 – Outside the scope of the legislation
A sports ground contracts out its canteen, concession and catering facilities to Snacks Ltd, a medium-sized catering company. The facilities are all on the sports ground’s premises but Snacks Ltd decides the opening hours, staffing levels, price structure, range of goods for sale and provides monthly reports to the sports ground on these areas. Snacks Ltd recruits cooks and other workers, pays all these workers through models of their choice, and arranges shifts and working hours, as well as agreeing rates of pay and salaries. Workers wear branded clothing showing the Snacks Ltd logo but are also required to wear photographic sports ground ID, so the sports ground need to know who is working for Snacks Ltd.
This is a contracted out service because all control is devolved from the sports ground to Snacks Ltd who are responsible for all staffing issues. There is no requirement for the workers to provide their personal service to the sports ground, it is provided to Snacks Ltd. Snacks Ltd is benefitting from the provision of the workers’ labour and the services of the workers align closely with the nature of Snacks Ltd’s business. There are a range of factors present which demonstrate that Snacks Ltd is most akin to the employer such as setting staffing levels and pricing structure, in addition to control and personal service. If the workers operate through intermediaries, Snacks Ltd will have to determine the workers’ status under the off-payroll working rules and issue SDSs and, if workers are within the rules, operate PAYE.
4 – Within the scope of the legislation
A large-sized business recruits IT contractors through IT Solutions Ltd, its central supplier, to develop an app enabling users to access and control their personal information centrally.
Workers all operate through PSCs contracting with IT Solutions Ltd rather than contracting directly with the large-sized business. The large-sized business has their own employees working on the same project to (amongst other things) provide technical guidance, arrange regular testing workshops and sign off the project at appropriate stages. The project service manager, who signs off the contract and who all workers report to, is an employee of the large-sized business. Even though the IT workers all apply their own skills to build and develop the app within the required parameters, they remain under the control of the project service manager. The workers use their own equipment (laptops recording devices etc) but work on the large-sized business’ premises. They require ID to access the premises, but email addresses all indicate that the workers are part of IT Solutions Ltd rather than the large-sized business itself. The fees payable to the worker(s) are negotiated between the worker and IT Solutions Ltd.
This is not a contracted out service. Workers may not be contracted directly to the large-sized business, but they are personally providing their services to them and are under its ultimate control. They will remain under the control of the large-sized business for the duration of the contract. The large-sized business retains ownership of the project, is ensuring quality and is contracting for the supply of workers rather than the production of a product. When considering the range of factors present the large-sized business is more akin to the employer. The large-sized business is benefitting from the provision of the workers’ labour so it must determine the workers’ status under the off-payroll working rules and should issue a SDS for each worker. In order to ensure it has discharged its responsibilities, the large-sized business should also provide the SDS for each worker to IT Solutions Ltd as the party it contracts with. Once IT Solutions Ltd is given the SDS for a worker by the large-sized business, as the party paying the worker’s PSC and having been given the SDS, IT Solutions Ltd will be the deemed employer and the fee-payer.