Statement of work and IR35: what you need to know

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April is fast approaching, private sector reforms are looming and many contractors and freelancers have been frantically trying to find a way to continue their outside IR35 assignments in the event of a blanket determination from their end client.

We know that hurried decisions don’t always offer favourable outcomes, so in an instance where a Statement of Works (SoW) is an option, we recommend you read through our guide to have the best understanding of the possible pros and cons of taking this route to ‘staying outside IR35.’

More attention has been paid to Statement of Work (SoW) arrangements since the announcement of the private sector IR35 reforms. Many workers and agencies alike believe this is the solution to status determination uncertainty, but is the SoW a viable alternative to a contract for services, or is it an option with onerous consequences?

We discuss what you as a recruiter should know about this route.

What is a Statement of Work?

A Statement of Work is a contract that defines the key deliverables required to be achieved to consider the assignment satisfactorily complete and therefore secure payment.

Typically, workers on a contract for services will carry out assignments on a ‘timed’ basis, for an agreed hourly or daily rate, whereas working via a SoW outlines milestones that need to be reached.

The difference between this type of contract and a contract for service is that the SoW shifts the agencies’ duty from purely providing the labour, to overseeing and being responsible for the deliverables outlined in the SoW.

Advantages and Disadvantages of a Statement of Work

Perhaps the biggest advantage is the lifted responsibility from the end hirer to determine IR35 status when a genuine SoW is in play. This is because where a service is genuinely outsourced the responsibility to determine the IR35 status of the assignment sits with the outsourcing company, not the end hirer. It is very unlikely that a supply of labour only would be regarded as an outsourced service.

However, you should be aware of the potential consequences of an incorrectly structured SoW and the risks to the end hirer. Should HMRC disagree that the SoW meets the criteria of a genuinely outsourced service, then the client may still be regarded as the end hirer and consequently carry the cost of any unpaid tax and NI as they failed to provide a Status Determination Statement.

Operating as a consultancy under a SoW rather than an employment business supplying labour inevitably carries more risk and suitable insurances must be in place during this arrangement, such as public liability and professional indemnity insurance.

With the SoW, focus is on the completion of key deliverables. This could be a significant risk, as payment is conditional upon meeting milestones and targets.

It is important to note that using this model will not remove IR35 considerations and will merely shift this to another party in the supply chain. This will be the consultancy (the provider of the outsourced services) if they are a medium or large company.

However, if the consultancy is regarded as a small company, the responsibility will remain with the individual PSC’s. An IR35-related factor to consider when an agency exclusively undertakes an assignment is the aspect of control – and how much they exert over the workers.

While the agency is responsible for the milestones laid out in the agreement being met, they should take care not to exercise too much control over workers, as this will lend weight to them falling inside IR35.

Should I choose a SoW or not?

In closing, the Statement of Work is not a way around the off-payroll rules. As with all other matters IR35-related the terms of the contract must reflect the reality of the working practices. It is also essential to consider whether you will meet the criteria of an outsourced service.  The SoW offers a way for agencies to manage contracts or assignments more closely than before – ensuring a higher quality of work and a set time frame.

Further, this option seems attractive to end hirers; they have the responsibility of determining IR35 status removed from them, providing the service is genuinely outsourced,

Always remember that if HMRC choses to investigate a SoW contract, their assessment will be based on the working practices and reality of how assignments are carried out; what is documented in the clauses contained in SoWs will not stand on its own.

If you would like information surrounding IR35, visit our knowledge centre or have a member of our agency support team contact you by filling out this callback request form.