IR35: Is a Statement of Works the Answer?
April 2020 will see IR35 extended to the private sector. To avoid risk, some firms have already decided on a blanket ban on Personal Service Contractors (PSCs). But, there could be smart ways to retain access to the highly skilled workers these firms will now be missing out on – bringing operational and cost benefits that will enable businesses to outcompete their peers.
You may have heard some people claim that engaging contractors on a Statement of Works (SoW) is the magic bullet that will ensure IR35 compliance. But is the SoW an answer in itself – or part of the answer?
The IR35 engagement problem
The big problem for firms is the traditional way they engage PSCs. They hire contractors to perform a role – and largely those roles are performed in the same way as the permanent employees they do their job alongside. They are effectively paid a salary on a daily or hourly rate. Managers have direction and control over their work – this is the form of ‘disguised employment’ that HMRC want to eliminate. Compliance will be a nightmare.
The ‘work package’ alternative
The alternative approach requires a fundamental change in mindset from the hiring firm – the ‘work provider’. Instead of creating a role profile to hire against, the work provider can translate the operational demand into a discrete ‘work package’ with specific outputs/deliverables – which is then articulated as a Statement of Works. Service providers (contractors) can then bid for the contract and then deliver its outputs in an IR35 compliant way.
Ensuring the SoW engagement is IR35 compliant
However, a SoW on its own is definitely not enough to satisfy HMRC that an engagement is compliant. They will be looking at how the contractor's work is actually delivered – if the contractor is still treated in a similar way to an employee and works as an employee, then the SoW is worthless. These are some of the key features of a compliant engagement:
- Clear outputs and deadlines for the package, with reviewable milestones along the way.
- Payment of a fee for the delivery of the output, not a salary for the number of days/hours worked.
- Financial risk transferred to the contractor – for example withholding payment until milestones are reached, or penalties for late delivery.
- No direct control, oversight or supervision of how the work is carried out – only progress review meetings.
- The service provider agrees to take responsibility for delivering the package, but other specialist may be substituted to carry the work out.
Making it work in the real world…
This approach of ‘packaging work’ might sound scary or impractical to many firms – it’s very different to the way they are used to operating. One challenge is gaining the buy-in of line managers – their support will be key to shifting from ‘hiring’ contractors to contracting out ‘work packages’.
Another challenge will come from managing the different contractor engagements required in a joined-up way – while ensuring total confidence in their compliance. For this model to work in the real world, firms will need to introduce robust internal systems – and they will need a new kind of relationship with recruitment vendors.
Firms that explore a new approach like this won’t just benefit from staffing cost savings and continued access to top talent with up-to-the-minute skills. They will also have the advantages of flexibility in their workforce and agility in their operations. The ‘work package’ model makes sense from a business point of view.
That’s why we have created the IR35 Compliance Managed Service for programmes of work that involve medium to high-volume use of contractors. We work with organisations to translate their needs, demands and goals into discrete packages of work, with a defined scope and clear deliverables.
If you would like to discuss this service or any aspect of IR35, get in touch on IR35@interimpartners.com or call on 0203 8543 467.