If you haven’t heard of a Statement of Work (SoW) before then you’d be forgiven. These formal agreements, used to guarantee that work completed by a contractor is done according to certain guidelines and expectations, weren’t previously all that common. However, their use is now on the rise.
Changes to the tax treatment of contractors are thought to be a key reason for more businesses moving towards SoW agreements. That’s because genuine SoW arrangements are outside IR35 and move any future IR35 risk down the supply chain. With SoWs becoming increasingly common, it makes sense to understand what they are and how they may affect your business.
What is a Statement of Work?
Businesses that work with contractors will use a SoW to set out how work should be completed during a specific project. This formal document defines the scope of work to be done and is how a growing number of external suppliers, such as recruitment agencies, engage contractors.
An effective SoW will define the specific services the contractor is expected to deliver, including work details, costs, timelines, terms and expected outcomes. Documents range in complexity, from simple statements to highly detailed specifications that leave no stone unturned. A SoW can be used for a wide variety of projects, ranging from one-off graphic design projects to large-scale government contracts.
In the simplest of terms, a SoW says 'in exchange for delivering X, you will be paid Y.'
Why are Statement of Works popular?
Analysts including Accenture and Deloitte predict that the contracting and freelancing market will grow to represent 30% of the UK workforce in the next few years. It’s a booming business and as more workers take the plunge and become independent contractor - and more businesses seek flexibility and their expertise - SoW arrangements are likely to continue to rise. Here are some factors driving their growth.
More skilled professionals are moving to on-demand, off-payroll contracting, and businesses are looking to them to adopt elastic resourcing as they scale their workforces up and down to adapt to the changing type and number of projects they handle. SoWs are increasingly being used to maintain productivity in businesses.
Because a SoW is a more formal arrangement and clearly defines what is expected of a contractor, many organisations use it to gain greater control over project costs and how they are delivered. They can use SoW arrangements to get a better handle of budget planning and financial forecasting – more so than they would with traditional time plus materials agreements.
The impending rollout of HMRC’s IR35 reforms in the private sector is another key factor pushing organisations to use SoWs. That’s because genuine SoW arrangements fall outside of the IR35 rules and mean that businesses engaging contractors aren’t obliged to pay their income tax and National Insurance Contributions (NICs). SoWs are increasingly giving businesses greater structure and visibility of their off-payroll engagements.
How SoWs will affect your business
In most cases, whether you have a SoW in place or not, it will be business as usual. For many, having a SoW in place could be a positive thing. A well-written SoW protects both you as the contractor and the business paying for your services. By clearly detailing the scope of the project – often including things like precise measurements, materials to be used, necessary tolerances, or quality control requirements – the contractor fully understands what is expected of them and there is little room for misinterpretation.
As a contractor, aim to avoid broad, generic, or vague SoWs if possible; they may leave you vulnerable to disputes further down the road. For example, you may misunderstand what is required from you and your client could then complain that you haven’t kept your side of the agreement and even make a claim against your business.
If properly implemented, a SoW arrangement is also likely to fall outside the IR35 rules, especially compared to the more traditional timesheet-based contracts that revolve around fixed hourly or daily rates. That’s because IR35 rules don’t usually apply where services have been fully contracted out to a third party and the contractors aren’t personally providing their services.
SoWs don’t fix everything, though. Any contractor not providing services on a genuine SoW arrangement, who currently works via their own limited company, will need to check whether their assignments are considered to be inside or outside of IR35. It’s worth getting an independent review each time to be sure.