How Kingsbridge can support businesses looking to offer services under a genuine statement of work (‘SOW’).
Recruitment companies are highly experienced in providing skills and people. Some have also been exploring the opportunity of providing what HMRC refers to as ‘contracted out services’ to their end-user clients. This means changing their business model from delivering traditional recruitment services (i.e., an individual) to becoming a ‘service provider’.
This will inevitably increase their business and financial risk exposure as they become responsible for deliverables and project outcomes. These services have different insurance requirements, too, which often lead to higher premiums. Additionally, there are other important considerations such as the off-payroll rules and whether ‘contracted out services’ fall outside of the legislation.
Business insurance requirements
When a business is looking to offer services to their clients under an SOW, they need to consider a new policy to cover these works – one where the definition within the SOW matches the definition on the insurance schedule (e.g., IT Consultant). In an SOW, it’s highly likely a recruiter will no longer be defined as an ‘employment agency’, but as a contractor or consultant.
They will however still be described as an ‘employment agency’ on their insurance business description, so are effectively uninsured for the SOW work. In which case, the best bet is to seek alternative professional indemnity combined cover or endorse their recruiter policy to include the SOW work. Professional indemnity, public liability, and employers’ liability are the essentials, but additional cover may be needed if there are contractual liability requirements around tax deductions, IP, or data protection
It's also worth noting that there’s a significant increase in risk exposure when offering services under an SOW as opposed to standard recruitment practices. Therefore, there must be an adequate level of protection in place. For businesses receiving services under an SOW, checking the service provider’s insurance cover and levels should be a factor when carrying out due-diligence checks.
Contractor insurance requirements
All organisations need to ensure they have the appropriate insurance in place as a business, but they also need to ensure that individual contractors working through a personal service company (‘PSC’) are covered.
Under an SOW, it’s highly likely that the service provider will be signing up to contractual obligations and taking responsibility for both the quality of the work and the outcomes. That means they would be the party who would be sued for any poor services or failures to deliver. An SOW makes undeniable responsibilities that have to be fulfilled, and it’s easily identifiable and trackable when there has been such a failure.
Service providers will be in a better position if the engagement carries genuine business and financial risk – including holding back payments pending satisfactory performance sign-off or rectification. It is because of this high exposure that most service providers pass the responsibility and risk to the individual contractor where appropriate, ensuring any additional reworks are undertaken at the contractor’s cost. This makes it even more important for any contractors providing services under an SOW to have adequate insurances in place.
IR35 considerations
The off-payroll working reforms placed a responsibility on end-hirers to determine the IR35 status of their PSC contractors. However, where the services are fully contracted out to a third party, that third party will become responsible for determining IR35 status. Therefore, if a company outsources work via a genuine SOW, the responsibility for determining IR35 status and ensuring the appropriate amount of tax is deducted will rest with the provider of the services not the end-hirer.
This was confirmed in a reference that HMRC made in their ESM10010 employment status manual. The manual confirms that the person who receives the fully contracted-out service does not need to apply the off-payroll working legislation, as they will be “the highest person in the chain” and will have no obligations under the new rules in relation to that contract. It is the service provider offering the fully contracted-out service who must consider if it’s within scope of the off-payroll working rules.
If this model is used correctly and the services are genuinely outsourced, it can relieve the burden of determining IR35 status for the ultimate engager – making it an attractive option for end users. An SOW can also become more cost-effective when scoped out and contracted correctly, as it can avoid significant cost increases or resource changes. It’s extremely important for services supplied under an SOW to be genuine, which means the end user needs to be able to totally turn over control to the service provider and accept anyone (not one specific contractor) to deliver the services.