HMRC - Contracted out Services and Statements of Work

We recently attended HMRC’s webinar on Contracted out services and Statements of Work and how they apply within the off-payroll working rules.  The theme from the webinar was certainly HMRC's position that regardless of what you call something and how it might be written in a contract, it will simply be disregarded if that doesn’t match the reality of the arrangements.  Furthermore, it is the HEI’s requirement to understand whether the off-payroll working rules apply or not, whether an arrangement is fully contracted out and whether a genuine Statement of Work points to a contracted out service or not.

Unfortunately, HMRC did not use this opportunity to drill down into how organisations check whether a service is a fully contracted out service or not, you'll still need to trawl through their manuals for that.  They did, however, provide some polar opposite examples, which is not really where the complexity lies.

For more information on understanding contracted out services, see BUFDG guidance.  

Contracted out services

HMRC were keen to point out that a fully contracted out service is question of fact based on commercial arrangements; you cannot simply relabel labour supply as a managed service to get out of operating the off-payroll working rules.

Under a fully contracted out service HMRC would expect to see:

• the party receiving the service sets out what is to be delivered,
• the recipient of the services has no say over who the service provider engages,
• the service provider agrees specifications and ensures quality,
• the service provider provides goods and materials as well as labour

However, caveating the above, HMRC stated that if labour is supplied as part of service, the off payroll working rules may still apply.  It is therefore essential to look at nature of relationships between contractor, client and service provider and HMRC pointed to examples in their Employment Status Manual (ESM10010).

They also provided additional examples in the webinar of where HMRC would agree arrangements were fully contracted out and where they would not. 

Statement of work

Statements of Work (SoW) are not defined in legislation but are a commonly used term to set out specific details of service.  It is not a contract in its own right however, so must be considered alongside the existing service agreement.  HMRC state that a SoW should usually cover purpose, scope of work (specifics), location, period of performance (start/finish times, number of hours billed, anything else relating to scheduling), deliverables schedule, applicable standards, acceptance criteria and a payment schedule.

Typically, under a contract for services, workers will carry out an assignment on a time basis, being paid by the hour for example.  Under SoW, workers will have set milestones that need to be reached before payment is made. 

As with contracted out services, HMRC reiterated that the existence of a SoW doesn’t automatically mean an engagement is contracted out.  HEs must continue to review the reality of arrangements and ensure they align with the contractual and SoW documentation.

Due Diligence

HMRC expects all ‘clients’ to have systems and processes that check the reality of the services being performed against the contract.  They cheerfully stated that if you identify a difference, “it’s not too late to put it right” and in the next breath informed attendees on how to make a voluntary disclosure.

HMRC summarised the webinar by again stating that the reality of an engagement will always determine whether the off-payroll workers rules apply, not what is written into a contract or SoW.  “There should not be any uncertainties between client and service provider about who has responsibility under the rules.”

That means all organisations must check whether arrangements fall within the off-payroll working rules and if a Statement of Work or Fully Contracted Out Service will be provided, it should leave absolutely no stone unturned in terms of each parties responsibilities.