JMI Compliance News: Contracted-Out Scenarios and IR35 – What Businesses Need to Know

Hiring contractors and temporary workers presents businesses with critical compliance responsibilities under the IR35 off-payroll working rules. One key area that can complicate IR35 compliance is determining if a worker falls inside or outside of IR35 in contracted-out service arrangements.

Understanding IR35 and Off-Payroll Reforms

In 2021, off-payroll reforms shifted the responsibility of determining a contractor’s IR35 status from the contractor (Personal Service Company or PSC) to the client (the business engaging the services). Under these rules, clients must issue a Status Determination Statement (SDS), ensuring IR35 status is assessed correctly. This change aimed to address widespread non-compliance where contractors misclassified themselves as outside IR35, paying fewer taxes as a result​.

Inside or Outside IR35?

A contractor falls inside IR35 if their working practices resemble an employee's, meaning they follow the client’s direction and control, work for long periods, and use company resources. Inside IR35, contractors must be taxed similarly to employees.

In contrast, outside IR35 applies to contractors who run their businesses independently. They determine how they deliver services, use their own tools, and manage multiple clients without being controlled by the end client​.

Contracted-Out Scenarios: What They Mean for IR35

In a traditional contractor-client relationship, a recruitment agency fills vacancies for a client business, making the client responsible for IR35 compliance. However, contracted-out arrangements (or Statement of Works) introduce complexity.

In these scenarios, a consultancy, not a recruitment agency, takes ownership of delivering a specific project or service. The consultancy manages how the work is done, creating vacancies within its own company to fulfil the project. The client (end business) doesn’t oversee the workers, so the consultancy becomes the “client” for IR35 purposes. This severance between the worker and the end business means the consultancy is responsible for making the IR35 determination, not the end business.

Imagine a bank hiring a design agency for a specific campaign. The agency engages a designer who works through their own PSC, sets their own hours, works remotely, and uses their own software. Based on these factors, the agency (not the bank) would determine that designer’s IR35 status. The key difference is the agency’s control over the work and its deliverables​.

Avoiding Pitfalls

Businesses should be cautious when considering contracted-out services. HMRC will scrutinise these arrangements to ensure they are not restructured solely to avoid IR35 responsibilities. Contract terms and real-world practices must align—consultancies must genuinely take ownership of the project, and day-to-day management of workers should rest with the consultancy, not the client.

Businesses should consider the following questions:

• Is the consultancy filling its own vacancies or merely passing on workers to fulfil client needs?

• Does the client control who is hired or how the work is managed?

• Are invoices project-based rather than tied to individual roles?

Ensuring that contracted-out services are legitimate and not an artificial way to avoid IR35 is vital to remain compliant.

Get Support

Navigating IR35 and contracted-out scenarios requires careful attention to both contracts and working practices. Businesses must take reasonable care when determining IR35 status and ensure proper SDS issuance.

For professional guidance on making IR35 determinations or evaluating contracted-out scenarios, contact JMI Compliance today.