A service or supplier is not exempt from IR35 simply because it is delivered under a Statement of Work. What matters is what the arrangement actually is: a genuine contracted-out service, where a supplier controls how the work gets done, or a supply of labour, where individuals are directed day-to-day by your business. HMRC looks past the contract's label to that substance. Where a SoW disguises a supply of labour, IR35 and off-payroll working obligations can apply, and the risk usually sits with whoever exercises control over the workers, most often the end client. Getting this right starts with knowing which of your Statements of Work are genuine services and which are labour supply in contract form.
Statements of Work sit at the centre of a live compliance question for Procurement, Finance and HR teams: does IR35 reach them, and if so, when? The short answer is that a Statement of Work carries no automatic exemption. What decides the answer is the substance of the arrangement it describes, not its title. This guide sets out the test, who it applies to, who carries the responsibility, and how to check your own SoW estate.
Does IR35 apply to a Statement of Work?
It can, if the Statement of Work is actually a supply of labour rather than a genuine contracted-out service. IR35 and the wider off-payroll working rules look at how the work is really delivered, not at the document's title. A SoW that describes a genuine service, one the supplier controls, resources and is accountable for delivering, generally sits outside IR35. A SoW that places individuals under your direction is a supply of labour in contract form, and that is where IR35 exposure sits.
What is a genuine contracted-out service?
A genuine contracted-out service is one where the supplier, not your business, controls how the work gets done. The supplier decides who does the work, how they're managed, and is accountable for the outcome, not just for supplying people. HMRC's own guidance on contracted-out services sets out this distinction directly, and warns that simply labelling an arrangement a “Statement of Work” does not, on its own, take it outside the off-payroll rules.
What does “disguised labour supply” mean under IR35?
Disguised labour supply is an arrangement dressed up as a service contract that is, in substance, a supply of individual workers. The signs are consistent: your business directs the day-to-day work, sets the hours, allocates tasks, and the “service” is really headcount by another name. Where this is what a Statement of Work actually is, HMRC treats it as labour supply for IR35 purposes, whatever the contract calls it.
How do I know if IR35 applies to my Statement of Work?
Ask one question: are you buying an outcome, or are you receiving people? If your business tells the individuals what to do and when, rather than the supplier managing delivery of a defined result, the arrangement looks like labour supply, and IR35 is likely to apply. If the supplier controls the how, and you're paying for a deliverable rather than a headcount, it looks like a genuine service. Most SoW estates contain a mix of both, which is why a document-by-document check matters more than a policy-level assumption.
Who is responsible for getting this right?
Responsibility generally follows control. Where a supplier delivers a genuine contracted-out service, the supplier carries the IR35 obligation and risk. Where the arrangement is really a supply of labour, that responsibility is more likely to fall to your business as the end client. Contractual wording that labels something a “service” does not shift this if the reality on the ground says otherwise, so relying on the SoW's title, or on a supplier's assurance, is unlikely to be enough on its own.
What are the risks of getting it wrong?
Misclassifying a labour supply arrangement as a contracted-out service leaves your business exposed to the off-payroll working rules applying retrospectively, with the tax and National Insurance liability, and the administrative cost of unwinding it, falling on the end client. HMRC will likely hold you accountable for not demonstrating reasonable care in accordance with the Off-Payroll Working (OPW) rules. Beyond the immediate exposure, it points to a wider visibility gap: if one SoW is misclassified, others in the same estate likely are too, and the risk compounds across every engagement built the same way.
The HS2 case
Following an HMRC compliance review, HMRC found HS2 had not carried out determinations for a population of workers supplied through third-party suppliers. HS2 had treated those engagements as fully outsourced services, on the view that the supplier was the client for off-payroll purposes and therefore owned the IR35 responsibility. HMRC took the view the arrangements were not genuinely contracted out and HS2 was the end client in reality, so HS2 owed the determinations and, having not made them, the PAYE and NIC liability.
How should procurement and finance teams check their SoW estate?
Review each Statement of Work against the question: outcome or headcount? Build a register of every SoW and MSA in force, showing who is delivering it, under which contract, and whether the day-to-day direction sits with the supplier or with your business. Score each one for the risk it actually carries rather than relying on its title. This is largely a visibility exercise before it's a legal one: most organisations can evidence their direct engagements far more easily than the ones routed through suppliers and third parties.
How CoComply can help
The hardest part of getting this right is seeing your whole Statement of Work and MSA estate clearly, not the test itself. CoComply's AI reads every SoW and MSA you hold, scores each one across six risk areas, and surfaces exactly where a document looks like a genuine service and where it looks like disguised labour supply, so Procurement and Finance can act with certainty instead of relying on a contract's title.
You can request a free analysis of your first five Statement of Work documents to see where your own SoW estate stands.
Frequently asked questions
Does IR35 apply to a Statement of Work?
It can. IR35 looks at whether the arrangement is a genuine contracted-out service or a disguised supply of labour, not at what the document is called.
What is the difference between a contracted-out service and a supply of labour under IR35?
A contracted-out service is controlled and delivered by the supplier, who is accountable for the outcome. A supply of labour is individuals directed day-to-day by your business, doing employee-type work under a different label.
Who is responsible for IR35 status on a Statement of Work?
It depends on who controls the work. Where it's a genuine contracted-out service, responsibility generally sits with the supplier. Where it's really a supply of labour, it's more likely to fall to your business as the end client.
What happens if a Statement of Work is found to be a disguised labour supply?
The off-payroll working rules can apply retrospectively, with tax and National Insurance liability typically falling on the end client, alongside the cost of unwinding the arrangement.
Is IR35 changing in 2026?
The core test, genuine service versus disguised labour supply, is not changing. A separate technical update is: the small-company size thresholds that decide who's exempt from IR35 obligations rose on 6 April 2025 (turnover from £10.2m to £15m, balance sheet from £5.1m to £7.5m), per HMRC's Employer Bulletin, though HMRC confirms this has no practical effect on off-payroll working determinations until 6 April 2027 at the earliest, since company size is assessed against prior years' figures. This does not alter how a Statement of Work itself is tested.
