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Statements of Work and IR35

Posted on 3 December 2021

Staffing companies continue to express interest in exploring the use of statements of work to provide services. Sometimes this is based on a belief that, unlike when providing resourcing services, using statements of work means that the IR35 off-payroll working tax rules do not apply. This, however, is not the case, the rules simply apply differently. However, if operated correctly, the statement of work model can reduce the complexities of IR35 and be more profitable than providing resourcing services.

What is a statement of work?

Although now frequently used by staffing companies, the term "statement of work" is not always fully understood in the recruitment services sector. Yet the use of statements of work is not new. Businesses that supply outsourced services, such as IT, have been using them for years. Usually contained in one of the schedules to an outsourced services contract, a statement of work is where the parties to the contract (the outsourced service provider and its client) set out the details of a project. Most statements of work will include sections on:

  • Objectives: the goals of the project
  • Scope of work: the work involved in the project
  • Deliverables: the services and/or products to be provided
  • Tasks: the activities that must be accomplished to perform the project
  • Location: where the work will be carried out
  • Milestones: targets set to track the progress of the project
  • Schedule: timeframes and deadlines for the project
  • Payment: criteria for achieving payment, dates and amounts
  • Success: criteria for measuring successful completion of the project and its modules
  • Standards: quality levels to be achieved
  • Requirements: equipment, IP or other resources the project team must use or provide, sometimes with requirements on the client, for example, the provision of IP licences.

This is obviously very different to a resourcing contract under which a staffing company provides a worker or a company contractor to a client. Operating the statement of work model requires a business to have in-house resource who possess the knowledge and expertise needed to understand the project and the work to be undertaken to perform it, and how to run the project to successful completion.

Why is IR35 relevant?

If an outsourced service provider engages its own employees to perform the services, IR35 does not come into play. If company contractors are engaged, as is highly likely to be the case for a staffing company operating the statement of work model, the application of IR35 must be considered. Prior to April 2021, it remained the company contractor's responsibility to deal with IR35 when they contracted with an outsourced service provider.  However, from 6 April 2021, as a result of new IR35 off-payroll working rules for the private sector and changes to the existing rules for the public sector, this responsibility moved to the outsourced service provider.

Background to the IR35 rules for outsourced service providers

The general rules

On 6 April 2017, responsibility for assessing IR35 tax status transferred from personal service company (PSC) contractors (and other intermediaries such as partnerships and sole traders) to staffing companies that place PSC contractors on public sector assignments. Under these rules, an assignment is what is often termed "within IR35" if the individual contractor who works on the assignment would be regarded as an employee of the public authority client for tax purposes if that client engaged the individual contractor directly. The public authority client must assess the contractor's status and provide the staffing company with a status determination statement. If the public authority client determines that:

  • the individual contractor would be regarded for income tax purposes as its employee or an office-holder if the services were provided under a contract directly between it and the individual; or
  • the individual is an office-holder who holds that office under the public authority client and the services relate to the office,

the staffing company is responsible for deducting and paying deemed employment income tax and employee's National Insurance contributions (NICs) from the fees it pays for the PSC contractor's services and for paying employer's NICs. The staffing company is also treated as the employer for employment allowance purposes.  Payments the staffing company makes to PSC contractors within IR35 count towards the staffing company's pay bill for the purposes of the apprenticeship levy, which it has to pay if its annual pay bill is more than £3 million.

These rules were rolled out to the private sector on 6 April 2021 with some changes for both the private and the public sector.

The rules for outsourced services

In the build-up to the introduction of the private sector IR35 off-payroll working rules (drawn out by a year's postponement to allow businesses to deal with the effects of the Covid-19 pandemic), many staffing companies explored the possibility of providing outsourced services, in other words, contracting with end user clients to supply the services performed by the contractors they placed on assignments rather than simply suppling the contractors. This was because, under the public sector IR35 off-payroll working rules introduced in April 2017, where there was a provision of outsourced services, such as IT or construction, rather than the supply of labour, the PSC contractor assessed IR35 status and, if the assignment was within IR35, paid the deemed employment income tax and NICs.

However, from 6 April 2021, although for this type of engagement model the private or public sector end user client does not have to consider whether or not IR35 applies, the entity which contracts with the PSC contractor (i.e. the outsourced service provider) instead of the PSC contractor must, unless the outsourced service provider falls within the small company exemption, assess IR35 status and pay to HMRC the tax and employee's and employer's NICs if the assignment is within IR35. This is because the outsourced service provider is supplying services (for example, software development services) to its end user client not labour (for example, IT contractors) and is therefore regarded as the "client" for IR35 purposes. Contractors engaged by an outsourced service provider who genuinely work under statement of work contracts are much more likely to be outside IR35 than those on time and materials contracts.

This was a significant change which made the statement of work model of engagement much less attractive. Although the outsourced service provider does not need to rely on the end user client making and providing it with an accurate status determination, it has the burden of assessing employment status and, if the contractor is within IR35, making the relevant deductions and payments to HMRC. Only if the outsourced service provider falls within the small company exemption will it remain the PSC's obligation to assess employment status and account for deemed employment income tax and NICs if the assignment is within IR35. 

A company qualifies as small if it satisfies at least two of the following three requirements in its financial year:

  1. no more than £10.2 million turnover;
  2. a balance sheet total of no more than £5.1 million; and
  3. an average number of no more than 50 employees.

For qualifying small companies with the right expertise, the statement of work model may therefore be an attractive option. However, it should be noted that, if an outsourced service provider is a member of a group of companies, the size of each member, including the outsourced service provider, is determined by aggregating the relevant figures of all the members. The outcome applies to all members of the group, which might mean that the small company exemption does not apply to an outsourced service provider by virtue of the size of other members of the group.

Risks and advantages of statements of work

Staffing companies should only operate the statement of work model if they are genuinely able to provide the services the contractors perform, including having in-house expertise at least in the form of a project manager and ideally having other in-house employees who possess the relevant expertise.  HMRC will see through attempts to badge resourcing services as statements of work.

The statement of work model requires the outsourced service provider to take responsibility for the delivery and quality of the services. Businesses operating this model should therefore protect themselves against the greater potential exposure to liability this brings by ensuring they have insurance cover which is appropriate for the services being provided. It would also be wise to consider setting up a separate company to provide the outsourced services in order to ring-fence liability and distinguish the outsourced service provision from the staffing business.

Staffing companies that adopt the statement of work model should ensure they are able to sell it successfully to clients, including being able to allay potential clients' fears that the model may not be being operated correctly. If the statement of work model is not correctly set up and run, HMRC might not consider the services to be outsourced services, but the supply of labour, potentially leaving the end user client with tax liabilities for failing to provide status determination statements. HMRC will always look behind the contracts at the reality on the ground.

Properly run statements of work do, however, mean reduced complexities for IR35 compliance and are potentially more lucrative. The provision of outsourced services generally commands higher fees than labour supply, reflecting the greater level of risk involved, the higher project management costs and better customer satisfaction. Many staffing companies have in any event (often reluctantly) been operating as an outsourced service provider for years under client-imposed contracts and may well have adapted their businesses and insurance cover to take account of this, thus giving them a head start on the experience they need to run successful statements of work and avoid some of the complexities of the IR35 off-payroll working rules.


Staffing companies considering using statements of work to escape the complexities of April's private sector IR35 off-payroll working rules will find that it is not the 'get out of jail free' card initially anticipated. If done correctly, however, in terms of ensuring compliance with the new IR35 rules, operating the statement of work model should still be less complicated than supplying resource and, although this model involves other risks, it could prove more profitable.


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