Recruiters shift IR35 liability costs to contractors

Recruiters are quietly tweaking their contracts to shift the cost of any IR35 liability they may face under the off-payroll rules away from them and onto the contractor’s limited company.

Such indemnity clauses, which also seek to protect the end-user, were inserted into a consultant’s new contract.

But he was not told of the clause; it took an IR35 review to flag it up.   

“[Your] Company shall indemnify and keep indemnified the Employment Business and the Client against any losses suffered or incurred by…[them from] the IR35 legislation”, it says.

‘Outrageous’

As to its chances of succeeding, experts are divided. Orange Genie’s boss Graham Fisher believes it is “outrageous” of agencies to use a clause to deny contractors the benefit of limited liability.

“The Off-Payroll…Legislation is deliberate and clear; the public sector body is responsible for the IR35 assessment and they have a duty of care in making the determination.

“We are not aware of [clauses like this] being imposed on any of our clients, but we would advise them not to sign…yet I'm not sure the clause would be enforceable,” he said.

Enforceability

Roger Sinclair, of legal firm egos, said he would need to see the whole contract, especially its definitions, to make a definitive analysis. But he too says the clause wouldn’t likely stand up.

“It does seem to me…that such a provision could not operate in a Chapter 10 situation”, he said. “The only [lawful] way they can achieve this end result is to agree a lower rate.”

Ben Grover, of recruitment law firm Lawspeed, agrees that the meaning which the contract assigns to the clause’s terms, like “losses,” is important in gauging its real-world application.

But enforceability can’t be ruled out. “Provided that there are no issues with the remainder of the contract, there is no reason why the clause would not succeed,” he warned in a statement.  

“[Except], HMRC would enforce the legislation i.e. against parties to which it can transfer liability e.g. the EB…and then the EB would have to pursue the PSC under contract law.”

So a separate civil claim to recover any losses that the Employment Business (EB) had incurred from IR35 would be launched, or the client could launch it if it incurred the losses. 

‘Who can say?’

However, whether the recruitment agency (the EB) would ever be able to ‘cash-in’ the indemnity is questionable, according to John Chaplin, executive director at EY.

“The liability might not be triggered for many years and who can say whether the [contractor’s] company has any assets or even exists at that point.”

Moreover, agencies are HMRC’s first port of call because, since April, any PAYE/NIC due is with the ‘fee-payer’ -- usually the agency, and “HMRC will ignore any indemnity they have”.

Chaplin added: “These clauses are mainly being used to keep contractors honest -- in the answers they provide to the IR35 questions asked, and in the way in which they operate. 

“There is also the incentive to help the agency in the event that HMRC ever questions the IR35 status, as any potential liability could transfer if they don’t. 

“Overall, I can see why an agency might put this clause into a contract but doubt that it will be successfully triggered on a regular basis.”

‘Negative direction’

Yet an IT contractor working under such a clause still sounded concerned yesterday, even though his agency has told him that his current indemnity insurance will cover the clause.

“The clause is in the contract I had to sign…[and] I am worried by [it], as it seems to go in a negative direction for contractors,” he said. “The agency didn’t alert me to it.”

The latter’s a deal-breaker for Mr Fisher, Orange Genie’s CEO. Any contractor finding a similar clause in their contract should quit and “seek an assignment with a respectable agency.”

‘Bullying’

He added: “These indemnity clauses are the equivalent to bullying and should be resisted.”

But Fisher says the clause itself should be a deal-breaker for HMRC too. “We discussed the use of indemnity clauses with the HMRC implementation team they indicated they would oppose them being used.”

Told that agencies were contractually shifting the cost of any IR35 liability onto contractors’ limited companies, a HMRC spokesperson said: “We don’t comment on commercial contracts.”

Editor’s Note: For clarity and additional context, here is the indemnity clause in full:

The Company shall indemnify and keep indemnified the Employment Business and the Client against any Losses suffered or incurred by the Employment Business or the Client by reason of any proceedings, claims or demands by any third party (including specifically, but without limitation, HM Revenue and Customs and any successor, equivalent or related body) pursuant to the IR35 Legislation, ITEPA or the NICs Legislation and/or any supporting or consequential secondary legislation relating thereto).