Contracted Out Services & Statements of Works – Are You Compliant?

In April 2021, changes to the off-payroll (IR35) rules were implemented in the private sector – a change that shook the temporary employment industry and has left clients, agencies, and contractors confused and questioning how to comply with the complicated legislation.

Some recruiters and hirers have begun searching for ways to decrease the impact of IR35 or perhaps even avoid it altogether (if possible). One of the most common arrangements we’ve seen arise recently is the “Statement of Works” model (also known as “contracted-out services”). Although some hiring organisations have implemented this kind of arrangement with the belief that it will absolve them of their IR35 responsibilities and liability – it isn’t always quite that simple.

In fact, over the last few months, HMRC has begun sending out letters to companies, asking them to provide evidence of the processes they are using to determine that any services they outsource are contracted out compliantly as they clamp down on non-compliant companies trying to avoid the new off payroll rules.

In this article, Tim Hunt, Strategic Planning and Sales Director at Crest Plus, and for many years a board member of the FCSA, outlines the features of these different models, explores the potential risks, and advises on the steps you should be taking (whether as a client or service provider) to ensure you’re always acting compliantly.

What is a Statement of works model?

A Statement of Works is a contract between two companies for the provision of services. Under a Statement of Works model, the recruitment agency no longer simply supplies labour to the end client; rather, their responsibility is now delivering the end client’s projects and pre-agreed deliverables.

This typically takes the form of a contract for services between the agency and end hirer that governs the Statement of Works. In this type of contract, the agency and client agree on the scope of work and commercial arrangements, detailing items like timeframes for completion, specific deliverables, and certain milestones.

Instead of providing a “supply of labour”, in which the agency sources and payrolls workers (e.g. sourcing and supplying a PSC to the hiring organisation), under the Statement of Works, the agency will supply services to the client, assuming responsibility for the successful delivery of work and sourcing workers to complete this function.

In essence, the recruiter goes from providing a source of labour to providing a service and hiring contractors to meet this labour requirement.

These arrangements are possible to manage compliantly, but they don’t mean the responsibility for IR35 is avoided completely, it just simply moves to the service provider (providing certain conditions are met). Therefore, Statement of Works arrangements must be handled carefully with utmost transparency and honesty from both parties and working practices must reflect contract wording. In many cases this will mean that this model will not work in practice.

How to distinguish a fully contracted-out service from an illegitimate Statement of works model

You should be cautious of any providers claiming you do not need to consider the off-payroll working rules when you are working with limited companies or self-employed individuals. Before agreeing to such arrangements, make sure you’re clear on your own responsibilities and why these may have moved to the service provider.

HMRC’s Employment Status Manual provides useful guidance on the matter of contracted-out services and who is responsible for applying the off-payroll rules:

Whether a contract is for a fully contracted-out service is a question of fact, based upon the commercial reality of the arrangements. Care should be taken to ensure that a labour supply contract has not simply been re-labelled as a managed service. For example, labelling a contract as a contracted-out service or a ‘Statement of Work’ when in reality the contract contains a provision for labour will not prevent the off-payroll working rules from applying, and the reality of the arrangements should be considered.

So, it’s important to remember, as with all IR35 compliance regulations, it is the commercial reality that matters just as much, if not more, than the nature of the contractual documentation.

Typically, with a fully contracted-out service, the service provider is responsible for procuring goods and materials in addition to taking responsibility for the supply and quality of the outsourced labour. If this is not the case, and the supply is wholly or substantially for labour, it is unlikely that HMRC will regard this as a genuinely contracted-out service. This means the end-user of the services will retain their IR35 responsibilities of determining the IR35 status using reasonable care and passing an accurate Status Determination Statement down the supply chain.

When is the client responsible for IR35 compliance?

Under the off-payroll rules, the client must conduct a status assessment and issue an SDS if you engage workers who work through their own limited company (often known as a personal service company/PSC) or another intermediary if you are:

• A medium or large-sized client organisation in the private sector
• A client organisation of any size in the public sector

If you choose to contract out activities to another organisation or a ‘service provider’, this responsibility may change providing the service provider is responsible for the provision of goods and materials, not simply labour.

When you enter into a genuine Statement of Works model or fully contracted-out service, you will no longer be classed as the client under the off-payroll working rules. Instead, the client will be the service provider since they are the person the worker is providing their services to. The best way to detect this is the party most akin to the worker’s employer.

Where there is uncertainty around who the true client is for off-payroll working, careful consideration should be given to the nature of the relevant contracts and working practices. Before agreeing to any arrangement of this kind, you should ensure that you understand what constitutes a fully contracted-out service, especially if you’re being told you may not be the client responsible for considering the off-payroll working rules, since, if you’re found to be the party responsible, liability and financial penalties will still sit with you.

As a first step, we recommend looking critically at the services you require and speaking with service providers about the scope of service they’re willing to provide. If it is simply a supply of labour, then it is highly unlikely that the contract is a fully contracted out service, no matter the terms of the contract. If this is the case, you will remain the client under the off-payroll working rules.

How to operate compliantly as the service provider

If you are the service provider working with end clients through Statement of Works agreements, you should make sure you’re clear with your hiring organisations about the scope of the service you provide to ensure you’re both agreed that this is the appropriate way to work.

If it is determined that you are providing a fully contracted-out service, then you will be considered the client under the off-payroll working rules unless you are a small organisation in the private sector. This means you must consider the IR35 employment status for any workers you supply who work through their own limited company or another intermediary. You must conduct a status assessment using reasonable care and issue a Status Determination Statement (SDS) to the relevant parties in the supply chain.

The likelihood is, your customers will wish to seek assurances from you about how you are applying the rules to ensure you’re operating compliantly since the risk could fall on them if not. We can help you conduct an audit and compliance health check of your IR35 procedures to help you prove to clients and HMRC you’re acting within the rules.

If you are not providing a fully contracted-out service, then your customer will remain the client under the off-payroll working rules – despite the Statement of Works agreement. You should inform your customer which of your workers will be providing their services through their own limited company or another intermediary. You should then expect to receive a Status Determination Statement from your client for any workers who operate this way. If the client then finds workers are ‘inside’ IR35 and you choose to pay these workers’ limited companies (or other intermediaries) yourself, you are responsible for operating PAYE, deducting Income Tax and employees’ & employers’ National Insurance contributions, and the Apprenticeship Levy (if applicable).

Of course, if your client finds these workers to be ‘inside’ IR35, you may choose to outsource your payroll burden with the support of a compliant Umbrella company, like Crest Plus Umbrella.

Here to help

We understand this can be complicated for hiring organisations, recruiters and contractors who simply want to operate compliantly and maximise opportunities.

With the support of our compliance experts, you can feel confident you’re taking all the necessary steps to keep your supply chain compliant. We offer free health checks to ensure you’re doing all you can to manage your processes according to the new regulations. Get in touch with our agency support team on 01244 684700 for help and advice on managing your compliance responsibilities.