Understanding how a Statement of Work is used and its potential impact upon IR35 compliance

STATEMENT OF WORK CONTRACTS

Contact: 0116 478 3390 info@qdoscommercialservices.com

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?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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.

Diagram showing the construction of a managed service agreement

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?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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
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Since we started working with Qdos we have been continually impressed by their technical excellence and flexible approach to designing bespoke solutions for complex requirements. By combining cutting edge technology with their knowledge of the legislation, they have provided us with an excellent service which has been of considerable benefit to our business and clients. Their knowledge of the market is exceptional and, as a result, they are very proactive and able to offer helpful advice and ideas.

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Steve Witts

Group Head of Tax and Treasury

Hays

WHEN IS A STATEMENT OF WORK USED?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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.

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.

WHO CAN USE A STATEMENT OF WORK?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

Any business wishing to outsource a project can use a Statement of Work. Put simply, a SoW sets out the details of the services being provided such as the key deliverables and milestones.

Its implications under IR35 however, will depend on the true nature of the arrangement.

IR35 STATUS REVIEW

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

Assess the IR35 status of your off-payroll workers fairly and compliantly with the Qdos Status Review platform. We assess workers based on two decades’ of experience handling enquiries and completing assessments, and insure the risks involved whilst ensuring your obligations are met under the off-payroll working rules.

STATEMENTS OF WORK AND THEIR IMPACT ON IR35

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

HOW A STATEMENT OF WORK COULD IMPACT IR35 OBLIGATIONS

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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.

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Working with Qdos and their IR35 status review tool has had two great advantages over standard agency contact with clients. Firstly it has really helped develop a deeper more consultative relationship (including clients established over 15 years!) and secondly it has given clients the confidence to act pragmatically when looking at the IR35 roll out to the private sector.

It’s great to be able to engage in this way with clients whilst at the same time talk to contractors confidently about their IR35 status moving forward. It is a tool I would thoroughly recommend using when engaging with any of your clients.

Richard Adamthwaite

Sales Director

RequiredIT

STATEMENT OF WORK FAQS AS ANSWERED BY OUR EXPERTS

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

WHAT SHOULD A STATEMENT OF WORK INCLUDE?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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.

Jessica Martin

Jessica Martin

Legal Consultant
Nigel Nordone

Nigel Nordone

Head of Tax

WHAT DOES A STATEMENT OF WORK LOOK LIKE?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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?

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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

QDOS COMMERCIAL SERVICES PROVIDING YOUR BUSINESS WITH THE TOOLS AND RESOURCES TO MANAGE IR35 CHANGES IN THE PRIVATE SECTOR

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

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