Statement of Work (SOW) arrangements have become increasingly popular and increasingly scrutinised. For organisations seeking flexibility beyond traditional contractor engagements, SOW offers an appealing model: engage a supplier to deliver defined outcomes rather than provide individual workers.
But HMRC has issued explicit warnings about SOW arrangements designed to circumvent off-payroll working rules. The tax authority sees a clear distinction between genuine service delivery and arrangements that are effectively disguised labour supply.
Understanding where that line sits - and ensuring your SOW arrangements fall on the right side of it - is essential for procurement leaders, tax directors, and anyone responsible for external workforce compliance.
What is a Statement of Work (SoW)?
A Statement of Work (SoW) is a commercial arrangement where an organisation contracts with a supplier to deliver defined outcomes or deliverables, rather than to provide individuals on a time-and-materials basis. In a genuine SoW, the supplier is responsible for how the work is delivered, manages its own people, and is paid based on outputs or milestones achieved. This contrasts with time-and-materials (T&M) or project-based contractor assignments, where individuals are engaged to provide effort, are typically directed day-to-day by the client, and are paid by the hour or day regardless of outcome. The distinction matters because SoW is intended to represent service delivery, not labour supply - and HMRC will assess arrangements based on how they operate in practice, not how they are labelled.
The HMRC Warning
HMRC hasn't been subtle about its concerns. Official guidance explicitly addresses:
“HMRC is aware of schemes advertised, which claim they can evade or bypass the off-payroll working rules. They claim to do this by presenting a supply of labour as a managed service, or by providing statements of work.”
The warning continues to describe arrangements: "HMRC’s concern is where a “statement of work” is used as a label, but the commercial reality is labour supply". Situations where the contractual wrapper says service delivery, but the reality is labour supply.
This isn't theoretical future enforcement. HMRC is actively scrutinising contracted-out services and SoW models during off-payroll compliance activity. Organisations that assumed SOW provided automatic protection from classification assessment are discovering otherwise.
Genuine SOW vs Disguised Labour
The fundamental question is straightforward: Is your supplier delivering outcomes using their own methods, or are they effectively providing individuals who work under your direction?
Hallmarks of Genuine SOW
Defined deliverables. The contract specifies what will be delivered - a completed system, a research report, a design project - not how many hours of effort will be provided.
Outcome-based pricing. Payment relates to deliverables achieved, milestones reached, or outcomes delivered. If you're paying by the hour or day regardless of output, that looks more like labour supply.
Supplier methodology. The supplier determines how the work is done. They bring their own approaches, tools, and expertise. You specify what you need delivered; they determine how to deliver it.
Supplier management. The supplier manages its own person(s). Day-to-day direction, task allocation, and performance management sit with the supplier, not with your managers.
Clear boundaries. The supplier's workers are identifiably separate from your organisation. Different systems access, different meetings, different reporting lines.
Substitution reality. The supplier can - and does - change which individuals work on your engagement without seeking your approval. The contract is with the company, not with specific people.
Red Flags for Disguised Labour
Time-and-materials pricing. If you're paying for days or hours of effort without defined deliverables, the arrangement looks like labour supply regardless of contractual labels.
Individual selection. If you interview and select specific individuals, approve or reject supplier personnel decisions, or effectively have veto over who works on your engagement, you're buying people, not outcomes.
Client direction. If your managers direct day-to-day work, assign tasks, and manage priorities for supplier personnel, the supplier isn't managing its own workforce - you are. Direction and control is often the biggest indicator of labour supply.
Integration. If supplier workers attend your team meetings, use your systems, follow your processes, and are indistinguishable from employees, the "service delivery" wrapper may not reflect reality.
Extension patterns. If the engagement started as a defined project but has extended repeatedly without clear new deliverables, it may have drifted from genuine SOW into ongoing labour provision. This isn’t definitive, but tenure is always worth tracking.
The Substance Over Form Principle
HMRC applies a "substance over form" approach to these assessments. What matters is the reality of the arrangement, not the contractual labels attached to it.
A contract that describes "consultancy services" and "deliverables" won't protect an arrangement that actually operates as time-and-materials labour supply. Conversely, a clearly structured engagement with genuine outcome-based delivery can be defended even if someone calls it by the wrong name.
This means organisations cannot rely on procurement categories or contract templates to determine compliance. The assessment must examine how arrangements actually operate in practice.
Why SOW Misuse Grew
Understanding why organisations moved toward SOW arrangements helps explain current scrutiny.
Headcount and Budget Management
Many organisations face headcount restrictions that don't apply to services spend. Engaging workers through SOW arrangements allows budget holders to access labour capacity without increasing official headcount numbers.
This isn't necessarily wrong - genuine project-based procurement can legitimately sit in services budgets. But when SOW is used purely to circumvent headcount controls, the underlying arrangement often isn't genuinely outcome based.
Classification Avoidance
Before the off-payroll working reforms, some believed SOW arrangements automatically fell outside classification assessment requirements. If you were buying a service from a company rather than engaging an individual, surely the rules didn't apply?
HMRC has made clear this isn't the case. Where SOW arrangements effectively provide workers who report into the client, the off-payroll rules apply regardless of the contractual structure.
Supplier Marketing
Some suppliers actively promoted SOW as a classification solution. "Avoid IR35 by engaging through our consultancy" was - and sometimes still is - a marketing message.
Organisations that relied on this advice are now finding that the arrangement structure doesn't provide the protection they assumed.
Assessment in Practice
For each SOW engagement, organisations should honestly assess the operational reality:
The Deliverables Test
Can you clearly describe what will be delivered, independent of how many hours it takes? If the answer is effectively "ongoing support" or "technical expertise," that's not a defined deliverable.
The Pricing Test
How is payment calculated? If it's fundamentally days × rate, the outcome wrapper may be cosmetic. Genuine SOW normally involves milestone payments, fixed fees for defined deliverables, or outcome-based compensation. There should be both financial risk and financial opportunity for the supplier. Again this isn’t definitive - T&M engagements can be genuine SoW engagements. But being able to analyse all your T&M engagements Vs you fixed price engagements makes this simple to check.
The Control Test
Who decides what the supplier's people work on each day? If your managers are directing, prioritising, and assigning work, you're exercising control that looks like employment.
The Integration Test
Could an observer distinguish supplier workers from your employees? Different badge colours and email domains aren't enough if working patterns, meeting attendance, and management structures are identical.
Building Compliant SOW Arrangements
Organisations that genuinely need outcome-based service delivery can structure arrangements to withstand scrutiny:
Define deliverables precisely. Be specific about what will be delivered, when, and how completion will be measured. Vague scope creates ambiguity that often resolves toward labour supply.
Price for outcomes. Structure commercial terms around deliverables, not effort. If circumstances require time-based elements, ensure they're genuinely supplementary to outcome-based core pricing.
Maintain separation. Keep supplier workers operationally distinct. Different systems, different meetings, different management structures. The more integration, the less it looks like service delivery.
Let suppliers take control. Resist the temptation to direct supplier personnel day-to-day. Specify requirements; let suppliers determine how to meet them.
Document the reality. Keep records that demonstrate how arrangements actually operate - not just contracts, but evidence of deliverables, milestone completion, and supplier-managed delivery.
Review regularly. Arrangements can drift over time. What started as genuine project delivery can evolve into ongoing labour provision. Regular review identifies when arrangements have shifted from their original intent.
Key Takeaways
- HMRC has explicitly warned about SOW arrangements used to avoid off-payroll rules
- The test is substance over form - how arrangements actually operate, not contractual labels
- Genuine SOW features defined deliverables, outcome-based pricing, supplier methodology, and supplier management
- Red flags include time-and-materials pricing, client direction, integration, and worker selection
- SOW misuse often stems from headcount management, classification avoidance beliefs, or supplier marketing
- Compliant arrangements require precise deliverables, outcome-based pricing, operational separation, and regular review
What This Means for Your Organisation
If your organisation uses SOW arrangements, an honest assessment of how they actually operate is essential. Many arrangements that started as genuine service delivery have drifted toward labour provision. Many arrangements structured as SOW were never genuinely outcome-based.
HMRC scrutiny of SOW is increasing. The organisations best positioned are those that are using tech to review and manage their arrangements against the substance-over-form test and restructured where necessary - before an investigation prompts the review.
If you'd like to assess whether your SOW arrangements would withstand scrutiny, CoComply can help you distinguish genuine service delivery from arrangements that create hidden classification exposure.