Before we begin, I think it’s important to define what a Statement of Work (SoW) actually is:
A Statement of Work is a contract between two parties that defines the key deliverables that are required to be achieved throughout the duration of an assignment for said assignment to be considered a success, which would then ensure payment between parties.
A contract would typically be carried out on a basis agreed on an hourly or daily pay rate, whereas the Statement of Work would be carried out based on predetermined milestones that had to be reached throughout. In the context of a supply chain that contained a Contractor > Recruitment Agency > End Client arrangement the key difference between a SoW and a contract for services assignment Is that the SoW changes the Recruitment agencies responsibilities from providing the supply of labour, to being the party that oversees and takes responsibility for the deliverables agreed in the Statement of Work.
With that in mind, what are the pros and cons of working with a Statement of Work?
Firstly, a true Statement of Work, and I say true in the sense that it isn’t being used to disguise an employee, gives the end client peace of mind that they don’t have to worry about the burden of responsibility with IR35. Which is obviously a big green tick in the SoW box.
Furthermore, because the assignment is based on tangible deliverables that are paid on delivery it gives the end-client both a second layer of protection and an extra degree of confidence that the quality of work being provided will be to a high standard.
From a contractor’s perspective, the immediate advantage comes from the fact that they can continue to operate under their LTD company on an outside IR35 basis. However, as with anything there are a few things to consider on the other side of the argument too.
Whilst payment being made on deliverables is obviously an extra layer of insulation for the end client, it could in some circumstances be a hindrance to the contractor as they are at the whim of that client and if they don’t deem the work to be satisfiable then the contractor could lose out on payment altogether. It is also worth considering that if the working practices of the assignment do not meet the criteria of an outsourced service, then the IR35 liability could fall back to the end client, leaving them exposed to the HMRC’s advances.
A Statement of Work does not mean that the supply chain is suddenly exempt from IR35 scrutiny, it simply means that the burden of responsibility shifts. Seeing it as a free pass to working outside IR35 is a sure-fire way to leave yourself in hot water, but providing you are operating on a true and legal basis, a Statement of Work could be a great option for some contractors.
The Alternative: Contract for Services
As the headline of this post suggests, a Statement of Work isn’t the panacea for all outside IR35 assignments. In some cases, one of, or both the contractor and end client won’t want to work to a project based on payment for deliverables. The good news is in these cases, again assuming that the assignment is truly outside of IR35, there is an alternative. Contract for Services.
As the name suggests, in a contract for services arrangement the end client would be using the contractor’s LTD Company for their services in a purely business to business relationship. This quashes any question of an employment relationship.
The contractor’s LTD Company would be tasked with working on a specific project or assignment, and once completed this would signal the end of their relationship with the end client. In order for an assignment to be contract for services as opposed to contract of services it would need to fulfil the Mutuality of Obligation, Right of Substitute and Supervision, Direction or Control requirements, alongside a few smaller requirements associated with an IR35 determination. More details on those are available here.
In the lead up to and post-April 2021 there will be of course plenty of debate around Statements of Work, and in all likelihood, we’ll see an increase in their use in the private sector. It is also worth noting that implementing a Statement of Work isn’t as simple as having it written down on a piece of paper, there are lots of moving parts and requirements and risks that must be considered, and upheld by all parties in the supply chain.
The good news to take away from this however, is that for professional contractors there are options to continue working as they have always done. Although it will take a little extra work to do so.
If you have any questions feel free to contact us at [email protected] or call 0161 833 1044.
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