IR35: Contracted-out difficulties don’t justify CEST-style tool, says HMRC

APSCo and Kingsbridge echo the CBI’s call for HMRC to build employers a tool to determine fully contracted-out services (or not). 

Difficulties around “contracted-out services” under the off-payroll working (OPW) rules are not “widespread enough” to justify building a CEST-type tool to help taxpayers. 

This shocking admission was made by HMRC at the latest Employment Status & Intermediaries Forum (ESIF). 

And it’s an admission that didn’t go down well yesterday with IR35 and OPW experts. 

One such expert, Ryan Dawson of Kingsbridge, says HMRC appears to have implied that a tool will only be viable once the difficulties with contracted-out services worsen. 

‘Contracted-out services misuse has proven costly, as HS2 shows’ 

Another IR35 status expert, Charlie Hemsworth of Bauer & Cottrell, says “widescale” or not, misuse of contracted-out services has already “proven costly for the taxpayer”. 

Hemsworth cited the 2021/22 accounts of High-Speed Rail 2, which indicated that misclassifying ‘contracted-out’ had cost the taxpayer-funded body £6million in HMRC payments. 

Meanwhile, the expert who forced the shock admission from HMRC this month (that difficulties with contracted-out don’t currently justify building a tool), says a contracted-out tool would have clear advantages. 

‘HMRC contracted-out services tool to cut red tape and reduce risk’ 

Speaking before the ESIF meeting on June 5 2025, Andy Scott, the CBI’s Interim Head of Tax Policy, said: “We’re calling for…an HMRC contracted-out services tool to cut procurement process red tape, and reduce risk in contracting with outsourced service providers.” 

Last night Kingsbridge, and recruitment body APSCo, endorsed the call by the CBI tax expert for HMRC to develop a tool for contracted-out services. 

At the Employment Status & Intermediaries Forum (formerly the IR35 Forum), Mr Scott was given a slot by HMRC to “present” to its 24 members in attendance on the “difficulties around contracted-out services”. 

‘The problem with contracted-out is not widescale enough to justify a tool’ 

But the ESIF’s published minutes add that Mr Scott probably left the meeting knowing the taxman had, in effect, already rejected his call for HMRC to develop a contracted-out tool. 

In fact, the minutes record ESIF chair Pete Downing of HMRC explaining “that the problem [with contracted-out] isn’t widescale enough to justify the resource of creating a tool”. 

The Deputy Director of Employment Status and Intermediaries Policy at HMRC, Mr Downing said this was HMRC’s “current position” on the build-case for a contracted-out services tool. 

‘More HMRC guidance needed on who the client is under IR35 rules’ 

As to the nature of the “problem” Mr Downing spoke of, one forum member’s comment is illuminating. 

The member told the forum that “work should be done to provide more guidance on who the client is under IR35 rules”. 

And that’s code for saying HMRC should save its straight talking-ness for what a genuinely fully contracted-out service does and doesn’t entail, according to Kingsbridge’s Mr Dawson. 

‘Contracting-out model/loophole can shift responsibilities under OPW rules’ 

“‘Contracting out’ has been a popular model – or ‘loophole’ for some – because its effect can be to shift IR35 responsibilities under OPW rules away from the ‘client’”, he began. 

“It’s due to where a client receives a fully contracted-out service, they won’t be the ‘end user’. The worker’s true client is the party to whom the work has been contracted out – i.e. the service provider.  

“And the service provider is the party most akin to the worker’s employer. Where there is a genuinely fully contracted-out service, then the service provider will be the party responsible for determining a worker’s employment status, if they are a medium-sized or large company.  

“Yet if they’re a small company, then the worker will be responsible for self-assessing their IR35 status under Chapter 8, Part 2 ITEPA 2003.” 

‘Not all businesses legitimately use contracting-out’ 

IR35 Project Manager Mr Dawson added that “some” businesses have used contracted-out services “legitimately” but others haven’t.  

In August 2021, HMRC sounded aware that firms might be manipulating ‘contracted out services’, also known as ‘Managed Services’ or ‘Statement of Works’ (SoW), to shift potential liabilities. 

“As a first step we recommend looking critically at the services you require”, HMRC warned in an Employer Bulletin chapter titled ‘Off-payroll (IR35) contracted out services – make sure you are applying the rules correctly’. 

“And if it is a supply of labour then it is highly unlikely that the contract represents a fully contracted out service. You would then remain the client for the purposes of the off-payroll working rules. 

“If the true nature of the service being provided is a supply of labour, then any written terms will not change this fact.” 

The August 2021 Employer Bulletin was HMRC firing a shot across the bows of employment businesses that rebranded as ‘consultancies’ and reworded their contracts, albeit without any changes to their core activity of labour supply. 

‘No matter how a service is labelled…’ 

Still suspicious in January 2025, HMRC reiterated:  

“No matter how a service is labelled, if the service includes any element of labour supply, the ultimate recipient of these services must decide whether they, or the service provider are the client. 

“Where a service has been fully contracted out, the party receiving the service will set out to the service provider what it expects to be delivered under the contract.  

“It will have no say, or interest in either who the service provider engages in delivery of the service, [or] how those individuals are contracted or paid. 

“[And] the service provider will usually have responsibility for agreeing the specification of the service, and for ensuring the quality of that service.” 

‘Liabilities under the off-payroll working rules’ 

HMRC added in a warning to end users: “Your organisation needs to consider every managed service on its own merits.  

“If you fail to do so, this could have consequences for your organisation, exposing you to liabilities under the off-payroll working rules.” 

But six months on from the latest of those two HMRC warnings on contracted-out services, little has changed, according to Bauer & Cottrell’s Tax Consultant Director. 

‘Using Statement of Works to be off-the-OPW-hook’ 

“Too often, we see clients relying on a Statement of Work-based contract and assume they’re off the hook for OPW, when in fact they’re simply relabelling a labour supply.   

“Historically, Contracted-Out Services – or ‘C-OS’ – has been viewed almost as a get-out.” 

Hemsworth added: “Many agencies have repositioned themselves as ‘consultancies’ without making real changes to how they provide resource. 

“And this is where engagers need to be very careful and ensure they carry out and document ‘due diligence’ on their supply chains to show reasonable care.”  

‘Window dressing a contract as a contracted-out service’ 

Kingsbridge says it’s just one of several IR35 advisories that regularly see some entities “window dressing a contract as a contracted-out service or SoW”. 

“In reality, though, it is just an agreement for labour”, cautioned Mr Dawson. 

“And that alone will not prevent the off-payroll working rules from applying to the recipient of that ‘arrangement’.  

“In such a case, the recipient of the service – i.e. the client, not the service provider – will have the responsibility for making contractor status determination statements, should they be a medium-sized or large business.” 

‘Poor visibility over contractors’ full affairs to assess status holistically’  

On behalf of the UK’s largest employers’ organisation, Mr Scott tabled before his ESIF presentation that the task facing busy employers who want to be HMRC-compliant is a significant one. 

“Fixed fees often mimic aggregated day rates. And hiring businesses lack visibility over contractors’ full affairs to assess status holistically.  

“Procurement teams face 4,000+ words of subjective guidance to check if services are truly out of scope.” 

‘Reform of IR35 contracted-out services has to start somewhere’ 

Potentially aware that his call for a HMRC-built tool might not be to everyone’s liking (in wake of CEST from 2017 still being much-maligned in 2025-26), Mr Scott added: 

“No solution will be perfect.  

“But reform has to start somewhere to reduce complexity and give businesses greater clarity.”  

‘Another tick-box tool that risks oversimplifying a complex issue’ 

Hemsworth isn’t so sure. 

Bauer & Cottrell’s status specialist, she told Kingsbridge: “Whether it’s ‘widescale’ – to use HMRC’s word, or not – the issue of C-OS has already proven costly to the taxpayer, as HS2’s OPW case shows. 

“Owing £6 million due to misclassifying contracted-out services is hardly a minor issue.  

“But no, I don’t think businesses will benefit in the long run from another tick-box tool that risks oversimplifying a complex issue. 

“And which could invite manipulation and give false reassurance.  

“The question of whether a service is genuinely contracted out is nuanced and rooted in how the arrangement operates in practice, not just how it’s written up.” 

Moreover, an online tool to gauge when a service is genuinely, fully contracted out (or not) already exists. 

‘TCoE’s Service or Supply of Resource Determination Tool’ 

“The Tax Centre of Excellence might be feeling a bit overlooked right about now because in 2022 they created TCoE’s Service or Supply of Resource Determination Tool”, explains Kingsbridge’s Mr Dawson. 

“While we quite regularly and happily support users who need help answering the tool’s 31 multiple-choice questions, it’s functionally a determination tool to determine if a service is fully contracted out or not.  

“In short, the TCoE’s tool gets to the bottom of who is the true end client for OPW purposes. If that’s a quandary you face, give TCoE’s contracted-out services tool a go.” 

‘IR35 green card to be classed as a genuine contracted-out service would be beneficial’ 

Dawson caveated that one contracted-out tool doesn’t mean a second tool should be ruled out. 

On the contrary, the sheer number of contracted-out queries which Kingsbridge receives makes its IR35 Project Manager think a “green card for a business to be classed as a genuine contracted-out service – if that’s what the CBI is calling for – would be beneficial”. 

The CBI’s Mr Scott has been invited to comment. 

‘Agencies seeing increased interest in outside IR35 contractors and contracting-out’ 

Tania Bowers, Global Public Policy Director at APSCo, told Kingsbridge: “With the introduction of the Employment Rights Bill, [our recruitment agency] members are already seeing increased interest in ‘outside IR35’ contractors and contracting-out services. 

“Therefore, HMRC must provide business and workers with the best tools to make the correct determination for tax.   

“We know that a CEST-style tool is by no means foolproof, but it at the very least gives a reliable steer. This could be complemented with other investigations to determine whether a contract’s scope is a contracted-out service if a ‘contracted-out’ CEST was developed.” 

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