As we edge ever closer to April 2020, when the new IR35 rules will apply, more and more end-clients are making blanket assessments to determine all contractors ‘inside IR35’. Not only will this reduce take home pay and increase NI for end-clients, but in many cases such assessments are unnecessary. Below we explore two alternatives to blanket determination, the Statement of Work Model and the Small Consultancy.
What is a Statement of Work (SOW)?
As opposed to the traditional “time and materials” style of engagement based on a set hourly or daily rate and delivered by an individual limited company worker, a SOW is an outcomes-based service, providing a robust structure describing milestones, specification, deliverables, timelines and performance criteria.
A SOW arrangement is not the utopian solution to staying outside IR35. Contractors need to be aware that HMRC’s IR35 assessment will be based on what happens in reality. Something documented in the clauses written into a SOW contract will not protect anyone involved if it is not a true reflection of the actual work carried out. Where, however, if properly implemented and performed correctly, a SOW arrangement is likely to fall outside the IR35 rules. This is because IR35 doesn’t apply where:
- the services have been fully contracted out to a third party and
- the contractors don’t personally provide their services to the end client
Is a SOW suitable for me?
As a result of IR35 reform, a number of contractors who are sole directors of their PSCs, are putting SOWs in place with their clients in order to show that clients who receive their ‘outsourced’ services will be exempt from IR35.
Working under a genuine SOW is only suitable for project-based services and is certainly not the silver bullet for all contractors seeking to work outside IR35. Contractors in the IT and Tech sectors tend to be able to make this transition more easily if they are already working on a project basis. Due to its simplicity, this model was actually one of the most commonly deployed during the public sector reforms in 2017.
However, the service must be a genuine business to business arrangement measured by deliverables and milestones., Consequently, you will no longer be paid for your time, but rather for a specific outcome. You will also take more risk as you will be required to remedy any defective work and payment will only be made on the achievement of specific milestones.
How do I negotiate this with the client?
Adapting an existing, time and materials-based contract with a client into a SOW may be difficult – particularly if you are continuing to provide the services yourself. To provide this service compliantly, contractors adopting this model will need to renegotiate terms with the client. WTT Legal can provide SOW contracts and change control documents. We can also help you renegotiate the terms with your client. Where possible, using your own contract to start negotiations not only gives the impression of professionalism but also puts you at a significant advantage during the project itself. It also puts you in a stronger position regarding any negotiation before the contract starts and your rights once a project is over.
The Small Consultancy option
SOWs can either be delivered by a contractor working through his own limited company or alternatively, through a consultancy firm. Traditionally, large consultancies have provided contractors to clients to remove inferred employment risk from the client. With the new rules, large consultancies (rather than the client) will be responsible for assessing their contractors’ IR35 status.
Are small consultancies exempt from the rules?
Some contractors are clubbing together to form small consultancies providing their services under a SOW. Small consultancies will be exempt from the new IR35 rules if they qualify as a small company (as defined under the Companies Act 2006). In those circumstances, as long as the exemption applies, contractors working through the consultancy will need to comply with the “old IR35 rules” where they are responsible for assessing their own IR35 status.
Why would my client prefer to work with a small consultancy?
Working with a small consultancy is an attractive alternative to clients who have concerns about IR35 compliance. If they are engaging with a large consulting firm, that firm assumes this risk and must conduct the status determinations of any contractors it engages. If, however the client is engaging with a small consultancy, the small companies’ exemption will apply which means that the “old IR35” rules apply so the contractors continue to bear the IR35 risk. An additional benefit is that small consultancies are generally more cost effective than traditional consultancy firms.
Working with a small consultancy also provides the client with more certainty on project price or output, with most of the risk transferring to the consultancy. We believe that we will see more clients preferring to obtain services under this model.A significant opportunity could exist for consulting firms able to position themselves as credible alternatives to the contractor market, whilst ensuring that their own risks to these reforms are mitigated.
Should you be interested in forming a small consultancy or simply having SoW contracts drafted for your circumstance, we can offer you a free consultation to determine whether this is a suitable model of engagement for your business. We can also provide our “consultancy package” which includes a risk assessment, contract templates, change control documents, Status Determination Statements, re-negotiation of contracts, Articles of Association, Companies House filings, bookkeeping and legal advice. Please contact info@WTTlegal.co.uk to book an appointment.