Is a ‘Statement of Work’ the answer to IR35 in the Private Sector?
With the introduction of the IR35 public sector changes in 2017 and the upcoming roll out in the private sector in April 2021, much attention has been drawn to the alternative models in which agencies and end-hirers can utilise. One of the most talked about models is Professional Services or the Statement of Work (“SoW”) model, which offers both a solution to end hirers’ IR35 headaches whilst also providing an opportunity for agencies to extend their service offering to end hirers.
What is a Statement of Work?
A statement of work is a contract between two companies, for the provision of services. The key difference here from a typical agency and end-hirer relationship would be, under the arrangement the role of the agency moves from the supply of labour to managing and delivering the end-hirer’s projects/agreed deliverables. In this scenario the agency would assume responsibility for the overall output of the service as the end-hirer has outsourced a service or project to the agency.
For example, end-hirer ‘A’ requires 3 cleaners to assist with the cleaning of their offices; they request that Agency ‘B’ supplies them with 3 workers to come and clean the offices, who will be provided with cleaning equipment by the end-hirer and paid an hourly fee for their services. This would be a supply of labour.
In contrast end hirer ‘C’ completely contracts the cleaning services out to Agency ‘D’. Agency D receives a fixed fee to deliver the services and assumes responsibility for the overall management of the service, including supplying the cleaning equipment, resource and meeting the required deliverables and service levels. In effect the cleaning service has been completely outsourced to Agency D and this would normally constitute a SoW.
This is of course not limited to cleaning services and end-hirer’s and agencies can agree on the delivery of a wide range of services and projects.
What does a Statement of Work look like?
There is no prescribed format of a SoW but primarily this would take the form of a contract for services between agency and the end-hirer which would govern the SoW. Alongside the agreed terms and conditions, the parties would agree the scope of work and the commercial arrangements. This would typically be a schedule containing the fixed fee, details on the timeframes for completion, and what the specific deliverables, outcome/output of the services will be.
There is a clear difference in what an agency will be supplying to their end-hirer compared to a supply of labour. Under many existing agency/end-hirer arrangements, agencies are contracted to source and payroll workers, for example sourcing and supplying a Personal Service Company (“PSC”) who will then be supplied to the end-hirer to deliver the works. Under a SoW, agencies will manage the service, so would themselves enter into a contract for services, assuming responsibility for the successful delivery using their existing talent pool of contractors/subcontractors.
The Benefits and Risks of a Statement of Work
There are some obvious advantages to operating on a SoW basis. There is increasing end-hirer demand on agencies to control the quality of the work and assume more responsibility for the services being delivered. A SoW provides an avenue for agencies to enhance its offering to their end-hirer’s in this regard and it is possible for agencies to charge a premium for assuming this extra responsibility.
The upcoming IR35 private sector changes add further responsibility for end hirers, in that they will be required to assess the tax status of any PSC’s engaged. Where an agency is supplying labour, the end-hirer will be required to determine the IR35 status of its PSC contractors. However, where the services are fully contracted-out to a third party, that third party will become responsible for determining IR35 status. If an end-hirer outsources work to an agency via a genuine SoW, the responsibility for determining IR35 status and ensuring the appropriate amount of tax is deducted, will rest with the agency, not the end hirer, which can be an attractive proposition for end-hirers.
There are of course added risks and responsibilities when operating via a SoW which should be considered prior to offering a contracted-out service to end-hirers.
The most immediate hurdle encountered will be ensuring that the SoW is structured correctly so that it is a truly outcome based, ‘contracted-out’ service. If HMRC deems that this is simply a supply of labour masquerading as a SoW they will look past the contractual set-up. Where HMRC view the contract to be one of labour supply, the end hirer will assume the legal obligation of demonstrating ‘Reasonable Care’ in determining IR35 status of off-payroll workers.
By assuming responsibility for delivering the services, the liabilities for not meeting the desired deliverables increase. Furthermore, the agency will need to ensure that they have sufficient resources at their disposal to meet the agreed deliverables.
If structured correctly, the agency will become responsible for determining the IR35 status of the workers engaged to deliver the service and ensuring the relevant amount of tax is deducted before payment is made whilst also becoming accountable for the successful delivery of the service. Agencies must be mindful of how much control they are exerting over their contractors as this will have implications on the IR35 status of workers. Opting to heavily control the workers will provide the agency with confidence and reassurance that the service is being delivered to the required specification and standard however exercising too much control is likely to have a negative impact on the contractors’ IR35 status, making it more difficult for the agency to attract the highly skilled and capable workers required to complete the work. The agency should assess the risk of both the delivery of the service and requirement to attract adequately skilled contractors, when operating via a SoW.
There are a host of other practical points that should be considered prior to committing to a SoW model. As most SoW’s are structured for a fixed fee that is paid upon the completion of tasks or at certain milestones, you should ensure that you have enough working capital to pay your workers for the duration of the SoW. As the agency are responsible for delivering the service it will also be necessary to ensure adequate insurance is in place.
What next?
There will of course continue to be much noise around SoW’s and no doubt an increase in their prominence in the market prior to April 2021 and beyond. Agencies should ensure they are adequately prepared when offering to engage on a SoW and understand this means more than just a change to the contract.
Implementing an offering a SoW model to end-hirers is no small feat. Agencies should seek to ensure that they have a sound understanding of exactly how to implement a SoW. Whilst there is the option to increase income by operating in this way, agencies should also ensure they fully understand the risks and responsibilities involved. Finally, agencies should make sure they have the capability both in terms of resource and infrastructure when looking to operate implement this way of working.
Find out what other steps you can take on your journey to IR35.