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So just what is a Statement of Work (SoW)? Basically it is a legally binding contractual agreement that is used to define and measure the delivery of a project or outcome, rather than the supply of labour via a typical agency-client relationship arrangement where a Personal Service Company (PSC) is sourced to deliver the work.
Since the off-payroll legislation was rolled out to the public sector in 2017 and more lately the private sector in April 2021, there’s been a significant increase in the use of SoWs, many genuine, and many shams.
When used correctly a SoW ensures outside IR35 compliance for all the PSC workers i.e. contractors who are provided as part of the service. However, just labelling an assignment as a SoW is not enough, it must be genuine.
Many businesses misunderstand SoWs and use them incorrectly, some on purpose as a quick fix to circumvent their IR35 responsibilities – using a loose interpretation of HMRC’s guidance that states clients who are receiving fully contracted-out services are exempt from the legislation.
There are punishments for abuse of the legislation, and HMRC aren’t naive to such tactics and are clamping down on such abuse of SoWs, meaning they should only be used in genuine circumstances.
Where the services are genuinely fully contracted-out, and so meeting HMRC’s guidance, the supplier of the service, which is usually the consultancy or agency, becomes the client for the purposes of IR35. This means that they are responsible for determining the IR35 status of its contingent workers rather than the client, who understandably becomes attracted to the SoW model given it lightens their IR35 responsibilities.
As a warning, simply putting a SoW in place is not sufficient to prove that fully contracted-out services are being provided, especially where the SoW does not reflect the actual arrangement. HMRC will cotton on very quickly that there is a paper exercise going on, that the actual working practices are quite different to the written SoW, and the reality is that there is a provision of labour.
Where the SoW is a sham, the responsibility for determining IR35 status goes back to the client rather than the supplier of the service. Not only that, but the client could also be found to be in breach of HMRC’s reasonable care requirement – resulting in the additional responsibility of now being liable for any tax liabilities, a double whammy.
As with anything in business, you prepare for divorce not marriage. Therefor the SoW clearly defines the scope of services, clarifying the deliverables, and removes any ambiguity.
There is no set format, but a typical SoW would often include the following:
– Scope of the work: The overview of the project or set of required outcomes
– Deliverables: The actual output required, which can be incremental, total or both
– Key milestones: The measurement of progress and outcomes, often triggering payment upon success
– Dependencies: What the client is required to provide to allow the deliverable to be realised
– Pricing & Due Dates: Exactly as it says on the tin
– All other relevant conditions and requirements: Other key items if and when required on a case-by-case basis.
A client, say a bank, needs a new app building for its clients, but it doesn’t have the internal expertise to build and manage the project. The bank decides to engage a specialist consultancy firm build and deliver the app.
Note: It won’t always be a specialist consultancy involved, it could be a professional services firm or a large recruitment agency that has a consultancy offering.
The app is a project that has clear outcomes and deliverables, as opposed a provision of labour. The specialist consultancy is responsible for the completion of the project, and will provide and maintain the necessary resource themselves, which can be a mix of permanent employees and contractors.
Ultimately as this is a project a price is agreed for the delivery of the app, and with specific outcomes (rather than being billed for time and materials). If the specialist consultancy goes under budget then it makes a profit – happy days. However, if the project overruns on cost, then that is the specialist consultancies to swallow, and if it makes a loss then so be it, the price is the price come what may.
