A HMRC contracted-out services tool is already long overdue

If the taxman can nip in the bud ‘contracted out’ issues, it would reassure us, APSCo and the CBI. It might also avert difficulties developing into disaster. 

When I mentioned last week (3rd July 2025) that we’re one of several IR35 advisories regularly observing supply chain businesses ‘window dressing’ a contract as a contracted-out service, the point some Kingsbridge Blog readers correctly understood was that the “problem” with ‘contracted out’ might be more “widescale” than HMRC would have you believe, writes Ryan Dawson, IR35 Project Manager at Kingsbridge. 

Not everyone caught this nuance and implication, however.  

Who is the client for IR35 purposes? It still REGULARLY confuses

That’s despite me also saying that our in-house off-payroll working (OPW) advisers have to support taxpayers stuck on the identity of the client (and are therefore unsure who the IR35 status-decider is), in contracted-out scenarios.  

And I even said that this support, often given by us gratis, was provided quite regularly.  

To some readers, though? They still got nothing! 

CLARIFIER: The issues with ‘contracted out’ ARE widespread 

So to be clear, and for the avoidance of doubt.  

Uttered by Pete Downing, its Deputy Director Employment Status and Intermediaries Policy, HMRC’s assertion to the Employment Status and Intermediaries (ESI) Forum that the “problem” with ‘contracted out’ isn’t “widescale enough to justify resource”, is totally at odds with our experience and beliefs.  

It’s also a bit strange. And it’s even a bit alarming.  

Why ‘contracted out’ comments by HMRC’s Pete Downing are alarming

First, the alarming bit. 

Is HMRC just going to sit there and wait until enough businesses are struggling with ‘contracted out’ failing en masse to correctly determine who the ‘end client’ is before they step in? 

While I struggle to keep my cool in this July heatwave, a quick recap on what the Employment Status Intermediaries forum minutes recorded: 

 “Another forum member asked for an update on contracted out services guidance. [HMRC’s] Pete Downing [chair of the ESI Forum], explained HMRC’s current position, which is that the problem isn’t widescale enough to justify the resource of creating a tool.” 

At this stage, perhaps a tad about our experience as a provider of insurance against liabilities under the IR35 off-payroll working legislation might be illuminating.  

HMRC asks ‘contracted out’ questions in nearly every IR35 probe we’ve supported

In almost every single IR35 compliance check under the OPW rules we’ve dealt with so far, HMRC has been very interested to understand if contracted-out services have been utilised. 

That same HMRC interest – plus a healthy dose of suspicion – shows up in the ‘off-payroll working compliance check letter’ that some organisations have been unfortunate enough to receive in 2025/26. 

What HMRC says about ‘contracted out’ to those it investigates

In what constitutes the first salvo of an IR35 off-payroll working investigation, HMRC instructs end users in the OPW compliance check letter to: 

“Provide details of your outsourced services that you believe are fully contracted out and therefore exempt from client responsibilities under the off-payroll working rules.” 

Maintaining that sense of suspicion, HMRC adds:  

“Please provide details of the process you use to determine that a service is fully contracted out.” 

Noticeable is the absence of anything in the HMRC letter that contextualises contracted-out services as rare or not widespread. 

Curiosity, punts, and ‘nothing to see here’…

At the very least, the “difficulties” with ‘contracted out’ (as the ESI Forum on June 5th 2025 heard them described as) appear to be widespread enough for HMRC’s inspectors to be very curious.  

If something wasn’t widespread, would you bother asking about it?  

Maybe as a punt.  

But then, with your potential ‘curiosity question’ out of the way, would you additionally bother asking a follow-up question about what processes, details, or assessments went into this not commonplace thing?  

What’s clear is that despite the ‘nothing to see here’ implication about ‘contracted out’ made to the ESI Forum by Mr Downing, two HMRC probes are quietly being made into ‘contracted out’ once an IR35 inspector calls. 

Two HMRC probes into ‘contracted out’ are being made right now

1. Have fully contracted-out services been utilised at all?
2. How was the service determined or classified as being fully contracted-out?

If you paraphrase the above two probes, while replacing the suspicion with an aim of offering some practical help, you might arrive at the following question:  

How do you decide what is genuinely contracted-out service or not?  

Well, HMRC guidance ESM10010 provides some clues as to what a genuine, “fully contracted-out service” looks like. 

The Employment Status Manual states that whether a contract is for a fully contracted-out service will be “a question of fact”, based upon the commercial reality of the arrangements.  

Fully contracted-out services: Three factors HMRC says to look for

According to HMRC, relevant factors include, but are not limited to, these three when trying to put the “fully” into a “contracted-out service”: 

1. Nature of the business 

1. Nature of the service provider’s contract 

1. Relationship between the worker, service provider and their client/customer 

Our take? The decision you make about your organisation’s operations can be extremely influential on which tax regime applies.  

I mean this in the context of ‘contracted out’. But there’s a strong nod to this HMRC truism – taxpayer behaviour colouring HMRC’s choice of enforceable tax regime – with the behind-the-scenes formulation of the draft umbrella company tax legislation, as Osborne Clarke has told us. 

‘Contracted out’ decisions made on a lean HMRC guidance library

Anyhow, the party that makes key decisions in your organisation, concerning status and procurement, is also massively important under the contracted-out rules.  

And our concern is that public and private sector organisations across the UK have made IR35 decisions in the ‘contracted out’ context with very little guidance or practical information from HMRC to go on. 

Until fairly recently, ESM10010 was almost the sole resource for contracted-out services guidance from HMRC.  

N.B. To try to increase its visibility, we linked last week to an August 2021 Employer Bulletin from HMRC. Despite being little-known, it contains some helpful tips on HMRC-compliant fully contracted-out services. 

First proper HMRC ‘contracted out’ guidance took six years to come about

The strongest helping hand from the taxman to taxpayers trying to understand what “fully contracted-out” means and involves was published in November 2023.  

But this welcome guidance came more than six years after the IR35 off-payroll working rules first struck the public sector – a sector that remains a huge user of contracted-out services in 2025/26. 

The Revenue’s November 2023 guidance was even something we understand had to be somewhat prised out of HMRC, after a few recruitment agencies pretty much demanded ‘contracted out’ help in writing. 

‘Help to comply…’ is HMRC’s best guidance on contracted-out services

Thanks to these recruiters (and an obliging taxman), the go-to for contracted-out services guidance in 2025/26 is ‘Help to comply with the reformed off-payroll working rules (IR35) — GfC4’. 

The relevant chapter for ‘contracted out’ is part 7, where HMRC tries to cover off the nuances of this challenging area of the OPW legislation. But the problem with this official “Contracted out services” guidance is that the examples provided by the Revenue are of limited use. 

The HMRC examples given – just three in total – address the more obvious ‘contracted out’ situations. Unfortunately, the three appear slightly adrift from the situations and circumstances that service providers, agencies, and end clients are facing on the ground. Further unhelpfully perhaps, one example is also very niche, as it centres on household refuse collection services. 

Nonetheless, for its details on contracted-out services, we hope part 7 of HMRC’s “Help to comply…” (or “GfC4” as it’s also called) is useful for some parties.  

HMRC’s ‘contracted out’ guidance (GfC4) doesn’t go far enough

But according to the bulk of organisations we speak to, the HMRC guidance just doesn’t go far enough in supporting them when it comes to making an informed decision about whether a service is fully contracted-out.  

I hope that our assessment of HMRC’s guidance in this complex area, where there appears to be both genuine misunderstanding and feigned misunderstanding (to put it mildly), reaches the ESI forum chair, Mr Downing.  

His assertion as a senior HMRC official that difficulties with ‘contracted out’ don’t justify the need for an online tool isn’t aligned with the actions of the Tax Centre of Excellence (TCoE), however.  

Wanted: a ‘Service or Supply of Resource Determination’ tool for the masses

A central government resource for departments to obtain tax advice and services, TCoE launched in 2022 a tool to help assess contracted-out services. 

The centre calls it “Contracted-Out Service or Supply of Resource Determination Tool”. 

But because finding a full version of the tool online is nigh on impossible, we believe there’s now a clear need for HMRC to produce a contracted-out service tool of its own, offering accessibility for all.  

A HMRC contracted-out services tool is already not before time

The CBI, the employers’ organisation, were first to call for a contracted-out services tool from HMRC.  

Like APSCo, we agree. The tool is something that HMRC should now commit to, because it’s long overdue for taxpayers to receive more substantive help on ‘contracted out’ matters, chiefly whether they are “fully” contracted-out. 

We do have a long list of CEST’s criticisms still ringing in our ears. 

Here’s the case for a ‘contracted out’ education package from the taxman

But a free-to-use HMRC ‘contracted out’ tool would be a great starting point – followed up (please, Mr Downing) with more thorough, in-depth, practical guidance, plus more real-world examples. 

Such a ‘contracted out’ education package from HMRC could provide more confidence to organisations that the decisions they’ve made/are making, and the services they’ve procured/ are procuring are taxed correctly.  

And importantly, that they’re taxed by the right party. 

‘More guidance on who the client is under IR35 rules’ – Where do we sign?

On that note, it’s reassuring that Mr Downing said on June 5th that he “would be happy to hear about areas that are problematic” in response to an ESI forum member saying that “work should be done to provide more guidance on who the client is under IR35 rules”.  

To us, that’s an entirely appropriate call. And the not-before-time “work” to build a contracted-out services tool, supported by guidance and examples, should start today. 

Contracted-out, or ‘fully’ contracted-out? Kingsbridge can inform your answer

Still stuck on contracted-out versus fully contracted-out?  

There are a handful of businesses, including Kingsbridge, that can provide support in making these types of determinations independently.  

Any business concerned about the validity of their contracted-out service should seek to read HMRC’s guidance and if required, engage an IR35 advisory for tailored support.  

And finally, nip this in the bud, HMRC…

The OPW rules are clearly here to stay, but that works both ways. Indeed, tax officials getting across contracted-out services, with a new tool, better guidance and everyday examples, represents a unique opportunity for HMRC to nip in the bud ‘contracted out’ “difficulties” before they develop into disaster. 

How we can support you

As is evident from above, navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. At Kingsbridge we offer tailored support, including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Our team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape.   

We also offer a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability.  

To find out more, speak to one of our in-house experts today, or get a quote.