IR35: Statement of Work contracts – an off-payroll contractor’s guide

When meticulously constructed and managed, Statement of Work-based contracts are not only advantageous for engagers outsourcing services but they can also assist contractors wanting to stay on the right side of the IR35 rules, writes Charlie Hemsworth of off-payroll working advisory Bauer & Cottrell.

What is a Statement of Work (SOW)?

Put simply, a SOW is a detailed document that outlines the specifics of a project or services, and the commercial arrangements of an engagement between a supplier and its client, including deliverables, timelines and basis of payment.

A Statement of Work is typically accompanied by an over-arching agreement or terms of business to provide a comprehensive framework for the engagement. 

SOWs play a crucial role in clearly defining the nature of the working relationship between a contractor and their client. They help establish the contractor's independent status and can be a valuable tool in demonstrating an outside IR35 position, as well as contributing to a transparent and mutually beneficial working arrangement between the parties.

The off-payroll rules and the rise of the SOW-based contract

We have seen a rise in SOW-based contracts since the advent of the Off-Payroll (IR35) rules in 2017 for the public sector, followed by their roll-out to the private sector in 2021, with many organisations outsourcing entire projects to suppliers or consultancies on a SOW-based, “contracted-out” arrangement, as an alternative to procuring contract labour to fill individual roles. 

As I covered in my other article on how merely relabelling ‘labour’ as ‘services’ to appear fully contracted out won’t dupe HMRC’s IR35 inspectors, SOW arrangements shift the responsibility of deciding the IR35 status of any off-payroll (limited company) resource away from the client and down to the next relevant party in the chain.

SOW benefits for limited company contractors

While SOW-based contracted-out arrangements are appealing for engagers procuring services due to their potential to absolve them from IR35 responsibilities, limited company contractors themselves can also benefit from SOW-based contracts with their clients, when they are well-constructed and managed correctly. 

Genuine SOW-based contracts typically point to an outside IR35 position. This is primarily because a true SOW-based arrangement is typically outcome-based, with payment dependent on successful delivery of an outcome or milestone. 

This basis of payment demonstrates a level of financial risk that is absent in any employment relationship. It also assists in demonstrating a lack of mutuality of obligation and retention of control by the contractor in terms of how and when the work is done. 

In addition to these factors contributing to demonstrating a genuine business-to-business relationship,  a SOW-based contract also establishes a transparent framework outlining project boundaries, scope, responsibilities and deliverables. As a result, the contractor is clear on what is expected, the client understands what they are receiving, and any deviation would require the contractual agreement of both parties.

For medium / large clients engaging limited company contractors, doing so on a true outcome-based SOW arrangement should put things in good stead for the contractor receiving an outside IR35 determination.

What should a Statement of Work contract include?

If you have agreed in principle the foundations of a SOW-based delivery with your client, getting the paperwork right is critical. Detail is key!

A SOW should include:

• Project overview: a brief description of the project's purpose and goals.
• Scope of work: detailed tasks, deliverables and outcomes, avoiding ‘job titles’ or generic job descriptions.
• Milestones (if applicable): specifying project phases, timelines, and key milestones.
• Deadlines: specifying the ‘due dates’ or deadlines for deliverables and milestones. Fixed hours wouldn’t usually be applicable. 
• Basis of payment and payment terms: payment schedules against deliverables / milestones.
• Equipment required for the work: For example PCs, laptops, mobile phones, software.
• Change control procedures: outlining the process for handling changes to the original scope.
• References: In particular, reference to the contractual terms / terms of business applicable to the SOW.
• Misc: Any other relevant terms or special conditions.  Top of Form

Do Time & Materials-based deliverables work in a SOW arrangement?

If a SOW is written with simply a job title or job description split into a set of “deliverables”, and paid for as a daily or hourly rate, this, in my opinion, does not meet the definition of a true SOW-based contract in the context of IR35. 

This is NOT to say such a contract would be ‘inside IR35’ by any means, but there would be little financial risk in this scenario (the main “in-business” pointer of a genuine SOW). And, as always, it would be necessary to consider other factors within the overall relationship such as control, right of substitution and mutuality of obligation. 

Risks

Inserting a document entitled “Statement of Work” into your contract is not a silver bullet by any stretch. As you can see there is a lot to be covered in a SOW and the working practices play a crucial role. Simply having a well-drafted document will be of no benefit if you and your client are not adhering to the agreed-upon SOW to a tee.

It’s equally important to make sure that the general terms of the contract applicable to the SOW do not contradict it and support the genuine business-to-business arrangement you are establishing with your client. Again, all must be accurately reflected in the working arrangements.

Window dressing SOWs won’t wash – with clients or HMRC

When carefully crafted and managed with great care, a SOW-based contract is not only a roadmap for project success but also provides a robust means to demonstrate that you operate as a genuine business, sitting firmly outside the IR35 legislation. 

It is crucial, however, to be vigilant against the pitfalls of 'window-dressing’ SOWs to make them look like they are something that they are not in reality, as superficial agreements will not wash with HMRC, or your potential clients.

Engaging an IR35 contract specialist with a good understanding of the practicalities of SOW-based arrangements can help you ensure your contractual documentation is drafted to fully align with the realities on the ground, thus enhancing the effectiveness of the SOW being an advantageous tool within the context of IR35.