Ensuring IR35 Compliance: Statement of Work

With the reforms to off-payroll working confirmed to go ahead as planned on 6th April 2021, many businesses have considered a Statement of Work (SoW) as part of their business strategy in response to the reforms.

SoWs are nothing new. Businesses have been using them for many years when engaging with suppliers to outline the specific details, milestones and deliverables of outsourced projects. However, in the run-up to the reforms, there has been an increased interest in this model due to the perceived benefits.

What is a Statement of Work?

A Statement of Work (SoW) is an agreement between two businesses that typically defines key deliverables to be achieved, to consider a project satisfactorily complete and therefore secure payment. They do not replace a contract and usually will be used alongside one – particularly where services are outsourced.

Typically, when supplying labour, assignments are delivered on a contract for services and paid on a time basis e.g. an agreed hourly or daily rate, whereas working via a SoW will usually see payments agreed based on milestones that need to be reached.

 

Why is this relevant to the IR35 reforms?

The reforms to off-payroll working place a responsibility on the end hirer to assess the IR35 status of assignments where they engage personal service companies. They still retain this responsibility when a recruitment agency is used to supply the worker. SoWs have gained attention in the run-up to the reforms as under Chapter 10, ITEPA 2003 (from 6 April 2021) – where there are genuinely outsourced services or ‘contracted-out services’ as HMRC refer to them – the business engaged to provide the outsourced services will instead bear the responsibility for determining the IR35 status of any contractors engaged through their own Personal Service Company (PSC), rather than the end user of these services. Of course, where this outsourced service provider is a small company, the small companies’ exemption will apply, and the individual limited company contractors will retain responsibility for assessing the IR35 status of the assignment.

SoWs are also used when engaging PSC contractors on projects to outline key deliverables and whilst they may lend weight to an outside IR35 status determination the presence of a SoW in this context is by no means determinative on its own.

 

What is a fully contracted-out service?

HMRC’s Employment Status Manual provides useful guidance on the matter of contracted-out services and who will be responsible for applying the off-payroll 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.

Source: https://www.gov.uk/hmrc-internal-manuals/employment-status-manual/esm10010

This serves as a reminder that, as with everything IR35, it is the commercial reality that matters not just the nature of the contractual documentation. Typically, with a fully contracted-out service, the service provider will be responsible for procuring goods and materials in addition to taking responsibility for the quality of the outsourced service. If this is not the case, and the supply is wholly or substantially for labour it is unlikely that HMRC will regard this a genuinely contracted-out service and the end user of the services will retain the end hirer responsibilities including responsibility for determining the IR35 of the assignments using reasonable care and providing a Status Determination Statement (SDS) to any workers engaged through personal service companies.

 

Changing business models

Recruitment agencies or consultancies that are adapting their business model to provide genuinely outsourced services, rather than supplying labour, must think carefully about this. There is additional financial risk associated with providing genuinely outsourced services, after all you will now be responsible for the quality of the service and additional overheads. Whilst this may mean you can charge more for this enhanced service; you will have increased costs and you need to consider whether your existing insurance meets your requirements. There is also a loss of control for the end hirer; if they have not used an outsourced service model before, this may be difficult to manage.

 

Is a Statement of Work a viable solution to the off-payroll reforms?

Many businesses already outsource services, for example IT support, cleaning or catering suppliers and for many businesses this works very well. However, it seems a disproportionate response to consider outsourced services solely due to the off-payroll reforms. Using this model will not remove IR35 considerations and will merely shift this to another party in the supply chain, the consultancy (the provider of the outsourced services) if they are a medium or large company.

There are consequences for the client if HMRC disagrees that the SoW meets the criteria of a genuinely outsourced service. The client will then be regarded as the end hirer and consequently, should an assignment be found to be inside IR35, the end hirer and not the outsourced service provider will carry the cost of any unpaid tax and NI as they failed to provide a Status Determination Statement.

Using a Statement of Work for genuinely outsourced services is a sensible way to ensure that expectations and responsibilities of parties are agreed and documented if it reflects the reality of commercial arrangements.  However, as a way to circumvent the reforms, it is inappropriate and introduces unnecessary risk.

The reforms to off-payroll working are manageable with the right preparation and with the correct advice. Investing in robust compliance processes and partnering with experts will put end hirers in a much better position come April 2021.

 

This article was written by Joanne Harris, Technical Commercial Manager at Parasol (FCSA Accredited Member firm)

 

Disclaimer: We have taken care to ensure that all information is provided is accurate and valid at the time of publication. Legal advice should always be sought before implementing any changes to processes and practices.

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