Can a Statement of Work Solve Your IR35 Headaches?

With the impending roll out of IR35 to the private sector, many are touting the Statement of Work (SoW) as a potential solution to IR35 headaches. But is the SoW approach really going to save contractors and private sector companies from the burden of IR35?

What is an SoW?

An SoW is essentially a type of contract between a supplier and their client, whereby the supplier is wholly responsible for the completion of a project or task, as per certain deliverables and milestones. Therefore, an SoW focuses on the task or project at hand (e.g. delivering X, Y and Z according to certain milestones and within a specified budget). This is a very different approach to a straightforward supply of labour agreement (e.g. working X hours a week for X hourly rate).

And this matters to IR35 because…?

IR35 rules are designed to crack down on disguised employment (essentially, employment dressed up in the guise of a contractor agreement). And this means a straightforward provision of labour arrangement may fall within IR35.

However, services that are genuinely contracted out to a third party are exempt from IR35 – which means, if an SoW demonstrates that a service is fully contracted out, then IR35 won’t apply. That’s the idea, anyway.

 The pros and cons of using an SoW approach

The fact that IR35 doesn’t apply to genuine SoW agreements is the main plus point here – potentially saving contractors, recruitment companies and private sector employers a huge IR35 burden. It’s a win-win for both the contractor and the business as the contractor is financially rewarded for doing the best work possible in the fastest time frame. For the business, using these correctly means that every penny spent is a penny invested as they only pay for work signed off.

But – and it’s a big but – the service must be genuinely outsourced for this to work. If you’re using an SoW to disguise a straightforward provision of labour, then you’ll very likely fall under IR35 rules. Ultimately, HMRC will look beyond the SoW to focus on the reality of the situation. If the SoW agreement isn’t a true reflection of the actual work being done, there’s a good chance you’ll get found out.

Used properly, an SoW is a great way to ensure you don’t fall foul of IR35 rules. However, contractors and the private sector companies hiring them must make sure the SoW is a true reflection of the actual contract work being done. Using an SoW as a quick-and-dirty way to escape IR35 is risky business.

Working with a reputable recruitment agency is a smart way to navigate the complex world of IR35 in relation to contract work. Download our free IR35 guide to find out how we can help or if you are interested in hearing more about how we have been able to architect a solution to a number of clients across a range of sectors, Call me on 020 7118 5500 or drop me a mail on r.bentley@roc-search.com