IR35 – an Opportunity for Consultancies and Statement of Work contractors?

With the countdown to 6th April ticking and the arrival of IR35 changes in the private sector now imminent, what are clients looking to do? Many will increasingly prefer to either hire full time employees or engage consulting firms/ contractors who deliver a service under a formal Statement of Work (SOW) or a similar arrangement. In these circumstances, where the service is genuinely outsourced, the IR35 status risk will sit with the consultancy rather than the client.  

Individual contractors working under a genuine SOW focussed on ‘outcomes’ are likely to fall outside the scope of IR35 rules.
Small consultancies (as defined by the Companies Act 2006) are exempt from the rules entirely, too.

What is a SOW?

A SOW:

  • is a legally binding, business-to-business contract of services between 2 (or more) parties
  • provides a robust structure describing milestones, specification, deliverables, timelines, payment conditions and performance criteria
  • is a service-based, outsourced agreement between the client and supplier (consultancy/ agency and/or limited company) in line with timescales and budget
  • can be used very effectively to ensure compliance against an IR35 determination, but only if implemented and performed correctly
  • is only suitable for project-based services and
  • is certainly not the “silver bullet” for all contractors seeking to work outside IR35.

How is it different from working through a limited company on an “outside IR35” basis?

In addition to complying with all of the factors which typically indicate an outside IR35 status (mutuality of obligation, substitution, part and parcel, financial risk etc), a SOW involves more risk to the contractor. This is because it is generally project based; payment is conditional upon meeting milestones and targets. Furthermore, it usually includes indemnities and an obligation to remedy any defective work. As mentioned above, a SOW is the provision of a service, rather than an individual filling a role and being engaged on an employment-based contract.

Why do clients want to engage consultancies who work on a SOW basis?

A SOW is an attractive alternative to clients who have concerns about IR35 compliance as the consulting firm assumes this risk and must conduct the status determinations of any contractors it engages. It provides the client with more certainty on project price or output. Furthermore, SOWs can be far more cost efficient and effective when scoped, managed and contracted properly.

It is likely that we will see more clients preferring to obtain services under this model. They do, however, require investment, strategy and planning. This in turn presents considerable opportunities for private sector consultancies or contractors working under a SOW.

What type of consultancies can engage on this basis?

1.Medium to large consultancies

Many traditional consultancies have a pool of independent contractors, using them to provide specialist expertise on an ad hoc project basis. But this model can expose consultancies to IR35 risks if these contractors are deemed to be disguised employees.

The main risk for consultancies going forward will be the shift of risk from the end client to the consultancy. Consequently, they must review their existing contracts and ensure that the working practices reflect those clauses. For contractors thinking of associating with a medium/large consultancy, it is crucial that the consultancy is providing a genuinely contracted out service to the client. It must not merely be a provision of labour, disguised as a consultancy agreement.

2. Staffing agencies

Traditional consultancies can be far too costly and restrictive for clients who are used to dealing with staff providers. Businesses such as these are experts in providing skills and people quickly and are capitalising on this ability by morphing into consultancies. However, many are having to change their business model and increase their business risk. This is because they will no longer be providing “a post filler” but the provision of a service which inevitably leads to higher insurance premiums. We predict that smaller agencies will not be able to keep up with the larger agencies who have already seized this opportunity.

3.Small consultancies

As small businesses are exempt from the new legislation, some contractors are considering clubbing together to form a small consultancy – thereby avoiding the new rules entirely. From a compliance perspective, creating a genuine consultancy which you then work through as a contractor is acceptable. Contractors engaged through the consultancy will retain the right to determine their own IR35 status (assuming this consultancy qualifies as a ‘small’ company). But, there’s a big difference between providing a service as a traditional contractor and doing so through a consultancy.

Adapting an existing time and materials-based contract into a consultancy arrangement with a client may be very difficult – particularly if you are continuing to provide the services yourself. To work compliantly, contractors adopting this model will need to renegotiate terms with the client.

Yet we see a huge opportunity for smaller consultancies to offer their expertise to the client and simultaneously remove IR35 risk. In particular, in the IT and Tech sectors which lend themselves to project-based working. But checks and procedures must be followed for this to be done properly.

4.Statement of Work PSCs

As a result of IR35 reform, a number of contractors who are the sole director of their PSC have negotiated a SOW with their client. In this way, they can demonstrate that clients who receive their ‘outsourced’ services will be exempt from the reform. Similar to other consultancy arrangements, such SOWs must reflect the reality of the engagement. Again, the transition for contractors in IT and Tech sectors is easier if they are working on a project basis.

Is a SOW the right approach in uncertain times?

It is clear that the new legislation will shift the risk from contractors to clients. This is consequently leading to significant change and new models emerging within the private sector. It is predicted that many staffing agencies will be delivering more projects with defined outcomes on a SOW as opposed to a “body” for a defined period. There will also be new insurance products to protect firms using contractors against potential liabilities whilst the IR35 status is not clear. For example, contractors will inevitably continue to (sometimes unwittingly) provide open-ended indemnities to end clients to protect against tax liabilities.

Finally, contractors will no longer stay for long periods with one client. Going forward, they will opt to move around more between clients or shift their working patterns to fall outside IR35. Despite this uncertainty, there are clearly opportunities for contractors who are able to offer their services, either through their own PSC on a project-basis, or through a consultancy.

How can WTT Legal help?

Should you be interested in working on a SOW basis or forming a small consultancy, we can offer you a free consultation to conduct a risk assessment to determine whether this is a suitable model of engagement for your business. Please contact info@WTTlegal.co.uk to book an appointment.