Statements of Work are not an IR35 silver-bullet

Contora SOW on laptop

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…but used correctly, they can provide evidence of compliance.

A Statement of Work (SoW) is a formal record that defines the complete scope of work involved on a project or service engagement.  Critically it states deliverables, budget / costs, timeline and any special terms BEFORE any work is actually started.

The Statement of Work is communicated to all stakeholders within a project and is used to define the work and avoid doubt or conflict.  Importantly, the SoW should reference the Master Service Agreement under which general terms are agreed.

How can a Statement of Work help to demonstrate Off-payroll compliance?

Used correctly, a Statement of Work can demonstrate off-payroll compliance but it is not a silver bullet; simply using a statement of work to engage a contractor ‘outside of IR35’ does not prove that the contractor is operating ‘outside of IR35’.

Note: Using an SoW does not negate the legal obligation, of the feepayer and hirer, to show due diligence in their status determination nor, the need to meet the key tests of IR35 (Mutuality of Obligation, Control and Risk) when engaging contractors ‘outside of IR35’.  

The content, structure and outcomes of the SoW must written with sufficient detail to demonstrate to HMRC that it is not ‘contrived’ and being used to simply circumnavigate the legislation 

What should a Statement of Work include?

  • Linked Master Service/Framework Agreement

Include details of the overarching Master Service or Framework Agreement between the two parties

  • SoW Effective Date

The date the SoW becomes effective – normally the date the SoW is signed by both parties.

  • SoW Term

The start date and end date of the Statement of Work (the start date may differ from the effective date)

  • Background

Provide sufficient background so that the supplier understand the reasons & context for the engagement.

  • Scope

This should define the boundaries of engagement, for example to a specific program, project or milestone.  It is sometimes helpful in more complex engagement to also specifically call out what is NOT in scope.

  • Services/Products

Identify specific services or products that are being provided by the supplier.  These are services/products to which deliverables will be assigned in order to deliver the product or service.

  • Deliverables

Identify the deliverables for each service or product that the client – try to ensure that these are detailed and measurable so that the Definition of Done (Acceptance Criteria) is clear for each milestone payment approval

  • Definition of Done

Ensure that the Definition of Done (DoD) is measurable, clear and unambiguous. Linking the DoD to test results or signed documents is a tangible example but whilst including something like ‘run daily stand-ups’ can be measured but lacks performance so ‘run daily stand-up and ensure sprints are delivered on time’ adds a performance qualifier.

  • Dependencies & Assumptions

It’s important that anything that is ambiguous or unknown is called out within this section.  For Example, dependencies are important when you have a reliance on a third party (managed by the client) to supply resources to support your work and assumptions are useful when facts aren’t fully known about the size of a deliverable and you want to limit exposure to risk

  • Reporting and Documentation

Indicate any reports or documentation expected as part of the service or product provision.

  • Milestones

Milestones link payments to Services and deliverables over a given period of time and are normally paid on successful completion. Milestone should indicate the payment value based on all deliverables being achieved.  They may also include adjustments or penalties for non-delivery.

  • Payment Model

There are a number of payment models that can be used in Statements of Work including:

      • Fixed Price:
        All payments are fixed based on successful delivery of products or services. Failure to deliver on time can result in all or part payment to be withheld.  Early successful completion still pays full amount.  Recommended for all ‘Outside IR35’ contractor engagements.
      • Capped Time Material & Expenses (Capped TM&E): 
        All payments based on day or hourly rate but are capped based on successful delivery of products or services.  Contingency is available with pre-approval. Can demonstrate risk if supplier fails to deliver and client doesn’t approve contingency but less opportunity to profit if completed early. Use with caution when engaging ‘Outside IR35’ Contractors.
      • Time Material & Expenses (TM&E):
        Payments are based on day or hourly rate with no cap to deliver the products or services required.  Not recommended for use with Outside IR35 contractors as this is considered by HMRC as disguised employment even with SoWs.
      • Risk & Reward:
        Increasingly popular approach which spreads the risk between client and supplier.  Supplier will normally discount the delivery cost in return for a percentage of the actual cost saving/profit increase to the customer after implementation. Can be difficult to quantify/validate the reward value but provides potential for much larger margins.  Can take  12 months for payment to materialise.
      • Additional Terms:
        Provides an opportunity for both parties to include additional terms that are no explicitly called out on the Master Service Agreement.
What else do I need consider?

A Statement of Work is usually supported by a separate, higher-level, Master Services Agreement.  Both of these items together contractually define the overall relationship between the parties but, from HMRCs perspective, they will be more interested in your actual ways of working and validating that what you say you do in your SDS and SoW, truly aligns with what you actually do.

Statements of Work must be treated as a ‘living’ document.

If you change the scope, timelines or value when executing the work then these changes must be updated and reflected in the Statement of Work before they are undertaken.  This means that a change control process must be available to support revision and extensions.

It is therefore crucial that the structure & content defined during creation of the SoW are aligned with the actual practices & ways of working demonstrated during execution of the delivery.  All of this needs to be documented and evidenced throughout the lifecycle of the engagement; every milestone, every deliverable, every approval & every payment and available for HMRC inspection for up to 7 years.

Statements of Work can provide a platform to support compliance with off-payroll legislation but it needs  a committed approach to documenting and managing the entire supply chain.

Contora is a platform that creates, manages and controls engagements throughout the resource supply chain.  It’s fully embedded audit trail capability ensures that every engagement activity is documented and immutably evidenced to support off-payroll compliance in real-time. 

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