Statements of Work (SoW) have become a key consideration for businesses when discussing their strategies in response to IR35 reform (the off-payroll working rules).
Despite their popularity however, the use of SoWs and how they can be used and incorporated by businesses into their contractual documentation is often misunderstood especially when it comes to the implications and use under the IR35 legislation.
There is a common misconception that engaging contractors with a Statement of Work or moving to such an arrangement between an agency supplier and client will automatically avoid IR35, however this is not the case. Read on to find out more about statements of work and their involvement in the IR35 conversation.
A Statement of Work is a document which details the specifics of a piece of outsourced work. It forms part of a managed service agreement between two parties (usually the end user and the supplier such as a consultancy business) for a specific project.
Generally, a SoW will accompany a Master Service Agreement (MSA) in place that governs the overall relationship of the parties (including high-level topics such as confidentiality and indemnification clauses), usually in the form of a schedule or addendum.
MSAs and the accompanying SoW are generally used to reflect that there is a fully contracted-out service, whereby the supplier is engaged to manage and deliver a project(s) under clear outcomes and deliverables, which is of course different to provision of labour, usually covered off by a standard contract for services.
Together, the MSA and SoW make up a managed service agreement for fully contracted-out services.
A Statement of Work is often far more detailed than your standard schedule which accompanies a contract for services, as it will include exactly what is included within the project, key milestones, payment terms, timeline, as well as specifics around how the project will be completed.
Qdos can assist in the drafting of a suitable managed service agreement for your business as well as advise on its suitability for your needs under the IR35 legislation.
A Statement of Work is, technically, not the same as a contract as it is seen to work alongside and compliment a contract (the MSA), rather than be a standalone contract within itself.
However, it is important to remember that when you hear the phrase “Statement of Work”, it may be referring to either of the following:
A Statement of Work is used to define the scope of services in a fully contracted-out service provision. It can be used in two ways:
In reaction to IR35 reforms, first in the public and now in the private sector, many organisations have been looking to use a Statement of Work as a way of circumventing the changes laid out in the off-payroll rules. This is because HMRC’s guidance states that clients who are receiving fully contracted-out services will be exempt from the legislation.
If services are genuinely fully contracted-out, the supplier of the services (i.e. the consultancy or agency) is considered the client for the purposes of IR35 and therefore carries the responsibility for determining the status of its contingent workers.
End users are therefore keen to utilise fully contracted-out services in order to avoid any obligations under the off-payroll rules, passing these on to the supplier.
There are many who believe that putting in place a SoW will be sufficient in demonstrating that fully contracted-out services are being provided. This is not necessarily the case, however, and if it is not a genuine reflection of the true arrangement, it could create far more risk for all parties involved.
This is particularly relevant when organisations are looking to change existing arrangements from a provision of labour to fully contracted-out services. It may be that the supplier in question is not set up to manage projects themselves and simply replacing the existing written agreements with a MSA and SoW is not enough.
HMRC are able to ‘see through’ any arrangement between a supplier and end user that is masking as a fully contracted-out service but is in fact a resource provision. In turn, this would see the end user responsible for determining IR35 (as opposed to the supplier). This could be seen as a failure of the end user to meet their obligations which could then see the end user liable for any alleged tax loss.
Similarly, engaging a contractor using a SoW does not automatically make the engagement ‘outside IR35’. An assessment will still be needed to determine the status of the contractor.
As is the case with IR35 in general, it is imperative that the structure of any written contract is borne out of reality as the true facts of the engagement will always take precedence. It is imperative therefore that professional advice is taken as to whether a managed service structure is appropriate.
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A Statement of Work should include:
Whilst there is no set format for the document, it should include as much information around what is included under the agreement – this prevents any later disputes around what was included in the costing and what would be additional.
In this article, we will take a look at contracted-out services, also known as outsourced services.
Ensure you are working with genuine managed service providers rather than labour only providers with the help of our specialist team.
Undertake a comprehensive IR35 audit for your business in preperation for the off-payroll working rules in April 2020.