Statement of Work Contracts

Get to grips with Statements of Work

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.

What is a Statement of Work?

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.

Is a Statement of Work the same as a contract?

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:

1. The actual SoW document itself which forms part of an outsourced service agreement alongside the MSA as above, and/or
2. The use of a Statement of Work as a method of engaging contractors with the aim of circumventing the IR35 off-payroll rules

When is a Statement of Work used?

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:

1. Where a client (end user) is engaging a business for the delivery of a specific project as opposed to the provision of labour
   
   Typically, the supplier in a SoW arrangement will be a specialist consultancy, a professional services firm, or a large recruitment company with a consultancy offering.
   
   The supplier will be responsible for the successful project completion and will provide and maintain the required resourcing themselves, which could include both their permanent employees and contract workers.
   
   For example:
   A global bank identifies a project for a new mobile app banking system. They don’t have the necessary expertise in-house to manage such a project, so they engage an IT recruitment agency with a consultancy provision to deliver the app. An MSA already exists between the two businesses as they have used them for a project the previous year, so a new statement of work is drafted for the delivery of a completed mobile app with clear milestones, estimates and breakdown of how it will be completed.
   
   
   
2. 2. Where a supplier or client is engaging a contractor to complete a specific project or element of a project with clear outcomes and deliverables.
3. The contractor will be responsible for specific outcomes for the project as opposed to engaged for their time and materials.
   
   A statement of work document will not automatically make the arrangement IR35 compliant nor the contractor outside IR35. Find out more about the IR35 implications below.
   
   For example:
   An IT recruitment agency with a consultancy provision has been engaged by a global bank to build a mobile app banking system. The project is managed by the recruitment agency which engages contractors to complete the project. They need a contractor in order to complete the UI design. They engage a personal service company (PSC) who is responsible for developing all wireframes, user workflows and design files required for the app. It is the first time they have worked with this PSC and so both an MSA and SoW is drafted with clear milestones, estimates and breakdown of how it will be completed.

How a Statement of Work could impact IR35 obligations

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.

Please get in touch for advice relevant for your business.