Why statement of work isn’t about disguising IR35 spend

Why SOW isnt about disguising IR35 spend

Since the extension of the IR35 rules into the private sector, statement of work (SOW) solutions have risen in prominence. Businesses have increasingly looked to mitigate against risks and liabilities by getting work done on a project-driven outcome basis through milestone payments.

Here at Comensura, we are concerned that some businesses (and the talent management consultancies they partner with) are misunderstanding the way in which SOW solutions can be deployed to manage services spend across many categories of supply.

To set the record straight, here’s what you need to know about SOW and IR35.

What is a statement of work?

A statement of work (SOW) is a document a business uses to engage a third-party to deliver a service or perform a specific piece of work, typically within a predefined time frame and for a fixed price. The individuals delivering services under an SOW may be employed by a services company or directly via their own limited company.

These agreements are usually billed based on a fixed price, payable on delivery, or for reaching specific milestones, which are agreed and outlined in a service agreement (the literal ‘statement of work’) before the project begins.

Read more about statement of work

Statement of work is not a substitute for IR35 determination due diligence

SOW is about measuring suppliers by output and objective milestones. You are paying your suppliers on the basis of a desired ‘outcome of a project’. It is not about trying to disguise work or projects that should actually be treated as ‘in scope’ of IR35 rules and managed in that way.

However, some decision makers mistakenly believe (or have been incorrectly advised) that SOW can be used to avoid IR35-associated risk, rather than as a distinct means of procuring external resource and supply. SOW only works when the scope of work, and deliverables, can be clearly defined and measured – and status determinations must always reflect this.  

IR35 determination should always happen before the appropriate method of engagement (which may or may not be SOW) is considered and selected. Businesses cannot simply skip the processes, protocols, checks and balances that HMRC would scrutinise and look at. And, as the DWP example highlights, it’s the end user who is in the frame for any mistakes or avoidance with regards to IR35.

A statement of work isn’t a replacement for a status determination. Businesses must be clear about whether or not a worker is inside or outside of scope before they even consider whether SOW is the best way to engage the person performing the work.

Watch out for statement of work by stealth

There has been a fair bit of chatter in the marketplace recently that you can use SOW to effectively avoid status determinations. That is not our view.

Nevertheless, we know the lines have become blurred when it comes to engaging individuals as part of an SOW solution - partly by misinformed or unscrupulous businesses selling the idea of statement of work as an IR35 ‘workaround’.

Obvious warning signs that a provider is suggesting SOW by stealth

If you are considering an SOW solution for your next project but are unsure if it is suitable, here are some of the tell-tale signs that a provider may be suggesting SOW by stealth:

  • The project is not outcome based and has no milestones – in order to be considered for an SOW solution, a project must have a defined beginning, middle and end.
  • Individuals are paid an hourly or day rate – payment terms should align with milestones and project completion. If professionals are contracted to be paid for hours worked rather than outputs this could suggest disguised employment.
  • You have been advised that you don’t need to make IR35 status determinations because SOW isn’t ‘in scope’ of IR35 – the decision to deploy statement of work solutions should always be separate to the determination process which decides if a worker or supplier is inside or outside of IR35. It is vital that you separate these processes.

Ultimately, businesses can’t bypass or ignore the processes and protocols around IR35: SOW and IR35 are not mutually exclusive.

A warning from HMRC on statement of work

HMRC has been very clear that organisations must exercise caution when taking an SOW approach. One of its recent Employer Bulletins includes a warning to businesses that may have misinterpreted the practice and value of statement of work services procurement. It reads:

“We understand that in some instances, arrangements are being put in place that mean some client organisations would no longer be responsible for considering the off-payroll working rules. These may be labelled as ‘contracted out services’ or ‘statement of works’. It is important that you fully consider any arrangements you enter into in response to the off-payroll working rules changing. Be especially cautious of any that claim you do not need to consider the off-payroll working rules.”

It continues:

“Whether a contract is for a fully contracted out service is a question of fact, based upon the commercial reality of the arrangements… As a first step we recommend looking critically at the services you require, and if it is a supply of labour then it is highly unlikely that the contract represents a fully contracted out service.”

We can help you decide if SOW is the best option

Comensura was formed to be different and to do things differently. As the talent acquisition landscape evolves, we continue to help our customers through an increasingly complex recruitment landscape in which ever-flexible workforce structures are required.

Statement of work solutions can offer businesses many benefits, but they must be handled with care. It is crucial that decision makers undertake proper due diligence around IR35 status determinations before they even contemplate if a project is suitable to be categorised as SOW – despite what others in the market may have you believe.

Get in touch to find out about our SOW solutions.

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