STATEMENT OF WORK CONTRACTS

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.

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.
Where a supplier or client is engaging a contractor to complete a specific project or element of a project with clear outcomes and deliverables.

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.

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 wire frames, 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.

WHAT SHOULD A STATEMENT OF WORK INCLUDE?

A Statement of Work should include:

• Details of the scope of work.
• Clear deliverables with scheduled due dates.
• Tasks set to reach those deliverables.
• Any equipment necessary for the work.
• Detailed outlining of costs and the due date for payment.
• Clear expectations set for the outcome.
• Any other necessary conditions/requirements.

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.

WHAT DOES A STATEMENT OF WORK LOOK LIKE?

A Statement of Work should contain all of the above components and be tailored to suit your business’ needs. If you require help putting together a bespoke fully contracted-out agreement please get in touch with a member of our team.

We will draft the MSA bespoke to your business needs along with an accompanying SoW, and advise the suitability of this type of arrangement.

WHY IS A STATEMENT OF WORK IMPORTANT?

A Master Service Agreement and accompanying Statement of Work build the foundations for the engagement. It presents the expectations of each party entering into the agreement. It mainly serves to cut out any potential misunderstanding of exactly what is included within the cost of the project and what is not.

Not only does a SoW provide the client with reassurance as to the engagement deliverables, but it also helps to avoid the possibility of future conflict in the contractual chain. This is due to the fact that it creates a shared understanding of exactly what is expected, as well as how, and when. It helps avoid ambiguity and therefore mitigate tension between the parties.

What it doesn’t do however, is provide an automatic pass when it comes to IR35.

COMMON TERMS AND WHAT THEY MEAN

Outsourced Service – fully contracted-out service – a project or portion of a project which is wholly delegated to a third party

MSA – Master Service Agreement: the high-level contractual agreement between two parties which governs the overall expectations of the relationship

SoW – Statement of Work: a document which defines the scope of specific services agreed between two parties which forms part of a contractual agreement

Scope of Work – the extent of the services to be provided (usually defined in the statement of work)

Managed Service – the support of a third party to deliver a project, strategy or other outcome

MSP – Managed Service Provider: a business which supports other organisations usually in relation to a specific expertise