Making a Statement of Work, work for you

Since IR35 was rolled out to the private sector in April 2021, recruiters have increasingly used Statements of Work.

Introduced in 2000, this legislation clarifies the self-employed status of small businesses operating as limited companies to reduce the number of people avoiding tax through dividends and family directorship appointments.

From April 2021, it was expanded to include all medium or large-sized clients outside the public sector. This means recruiters are more affected as they connect their hiring clients to these self-employed individuals – the Personal Services Company (PSC) – otherwise known as a single person Limited Company Contractor. It's this group of workers who are subject to the amended IR35 rules introduced to the private sector in April 2021. Hirers may need to pay more tax and NI for contractors, even if they are not on the main payroll.

The reason recruiters are signing Statement of Works documents- even when their business model has traditionally been to provide temporary labour- is because clients (hirers) have started to require this type of contract to minimise their IR35 risk. A Statement of Works captures and defines all project elements, including deadlines, budgets and brief. It is seen as a solution to potential IR35 headaches around hiring self-employed individuals and freelancers. The recruiter becomes the conduit - and eradicates the hirer's liability for increased tax and NI.  

It does, however, require recruiters to extend their service offering to their clients. The recruiter effectively becomes an outsourced contractor or consultancy, where the hirer only pays the recruiter on the achievement of certain milestones and deliveries.

1. There are risks and responsibilities involved, so all recruiters using Statements of Works need to ensure the following:
2. They carry out the worker's tax determination status, which saves hirers money and reduces their risk of investigation by HMRC.
3. They draw up an effective, legally binding  Contract Terms and Conditions document to avoid this becoming a disguised employment provision, which the HMRC would see through.
4. That they demonstrate reasonable care in determining the IR35 status of workers
5. They provide the necessary insurances to cover the enhanced risk assumed under these contracts. This includes a breach of contracts, which could incur penalties from the hirers if the work is not done on time or to the satisfaction of the hirers. This will create a primary risk, where previously, the risk was more contingent.

A key element here is that the recruiter must demonstrate some evidence of involvement – direction, supervision, or control over the people carrying out the work in the contract – which can  create more risk, insurance and administration costs. The recruiter will need to pay the workers until the work is completed: the hirers ultimately pay for the service when their desired outcome is achieved. At the very least, this can impact the cash flow, but it also leaves the recruiter vulnerable. If the hirer goes bust, then the recruiter is left out of pocket.

While these contracts are understandably gaining popularity with end hirers, recruiters need to look at all elements of the Statements of Works carefully. This is not a 'tick-box' option to win more business; it can impact margins, incur a lot more work, and require additional insurance policies such as credit insurance.

There are over 4million limited companies registered in the UK, with 500,000 new ones registered each year. Many of these will be sole trading individuals who have chosen a limited company structure because their industry prefers it or to help reduce monthly tax payments.

Now that IR35 legislation applies to the private and public sectors, it's imperative that recruiters consider entering these contracts and do not put themselves at risk. As an REC member, you can arrange a free insurance health check and 10% discount off your recruitment insurance. Don't leave it to chance without checking you have the essential protection you need.

This is a marketing communication:

The REC is an Introducer Appointed Representative of Jelf Insurance Brokers Ltd trading as Marsh Commercial, which is authorised and regulated by the Financial Conduct Authority (FCA). Not all products and services offered are regulated by the FCA (for details see www.marshcommercial.co.uk/info/regulation/). Registered in England and Wales number 0837227. Registered Office: 1 Tower Place West, London EC3R 5BU.

1 https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

[2] https://companieshouse.blog.gov.uk/about-companies-house/