Liability Transfer When SDS Is Outside

[DrStrange]

In the following chain:

EndClient => PayrollMSP => Agency => LtdCo

The EndClient has assessed LtdCo as Outside IR35. The SDS has been passed to the PayrollMSP, the Agency, and to the LtdCo.

However, both the PayrollMSP and the Agency want indemnities from LtdCo to cover any future tax/NIC liability if HMRC are ever successful at an FTT.

My understanding was that the EndClient would be liable for any incorrect assessment and that, so long as PayrollMSP pass SDS to Agency, PayrollMSP has no liability. Agency, as the fee payer, has to deduct taxes based upon SDS (so in this case, none) so Agency also has no liability.

Why, then, would they both be insisting on an indemnity? What am I missing re the risks they're carrying?

[jamesbrown]

Once the SDS, compiled with reasonable care, has been passed on (timely), the Fee Payer is liable for an incorrect SDS in the first instance, absent fraud.

In other words, the SDS process is like "pass the parcel" w/r to liability.

The Fee Payer here is the Agency.

If HMRC cannot recover debts from the Fee Payer within a reasonable time-frame, they can move up the supply chain.

So, no, there is risk everywhere in the supply chain above LtdCo (and including LtdCo in terms of fraud and contractual clauses) and, yes, they may want to indemnify, including with contract clauses. Of course, they may fail to do so successfully.

[simes]

Oh Lord.

I must admit, my thinking was along the lines of that of the Dr.

If indeed James, you are right, (no reason to think otherwise), I cannot see why any right thinking entity would ever want to hire a contractor again.

In one fell swoop, the ease of yore of hiring and terminating a contractor has become more problematic than that of hiring and making redundant a permie. As much as it hurts, I feel for the clients right now.

[jamesbrown]

Oh Lord.

I must admit, my thinking was along the lines of that of the Dr.

If indeed James, you are right, (no reason to think otherwise), I cannot see why any right thinking entity would ever want to hire a contractor again.

In one fell swoop, the ease of yore of hiring and terminating a contractor has become more problematic than that of hiring and making redundant a permie. As much as it hurts, I feel for the clients right now.

It's one of the major criticisms of the legislation and always has been, right from the consultation phase. The client completes the SDS, but the client is not liable for that SDS being incorrect once it's sent out the door (except under one of the several caveats I mentioned: reasonable care, timeliness, fraud).

[DrStrange]

Once the SDS, compiled with reasonable care, has been passed on (timely), the Fee Payer is liable for an incorrect SDS in the first instance, absent fraud.

In other words, the SDS process is like "pass the parcel" w/r to liability.

The Fee Payer here is the Agency.

If HMRC cannot recover debts from the Fee Payer within a reasonable time-frame, they can move up the supply chain.

So, no, there is risk everywhere in the supply chain above LtdCo (and including LtdCo in terms of fraud and contractual clauses) and, yes, they may want to indemnify, including with contract clauses. Of course, they may fail to do so successfully.

I thought the fee payer was only liable if they didn't follow the SDS or didn't ensure they received one, properly completed.

Why would any agency ever want to place a contractor then if they're unable to influence any decision made but are liable for another's decisions?

And, if this is the case, why are so many clients going inside? Surely they can say "outside" in genuine cases and leave the Agency to worry about the risk?

I'm not comfortable supplying the whole chain with an indemnity - I thought the only benefit to us now was being relieved of the risk once an SDS is issued

[eek]

And, if this is the case, why are so many clients going inside? Surely they can say "outside" in genuine cases and leave the Agency to worry about the risk?

Because HMRC have said they want to create a few examples "as incentives" and when they find cases they will be using the client's weakest cases then asking for all 700 other contractors to be taken into account when calculating the amount owed.

And the chat where this bit is occurring is during the coffee break...

[jamesbrown]

I thought the fee payer was only liable if they didn't follow the SDS or didn't ensure they received one, properly completed.

Why would any agency ever want to place a contractor then if they're unable to influence any decision made but are liable for another's decisions?

And, if this is the case, why are so many clients going inside? Surely they can say "outside" in genuine cases and leave the Agency to worry about the risk?

I'm not comfortable supplying the whole chain with an indemnity - I thought the only benefit to us now was being relieved of the risk once an SDS is issued

Why do you think so many companies are avoiding status determinations altogether?

Like I said, liability potentially reaches every part of the supply chain above the contractor’s PSC. It initially rests with the Fee Payer, once the SDS has been passed on, as I described above, but any debts can be transferred up the supply chain if they cannot be recovered from the Fee Payer within a reasonable timeframe.

The only risks to your PSC (and you) now are contractual clauses to indemnify and fraud and really only the former. Will these contractual clauses work? Arguably not (but they might).

[DrStrange]

Why do you think so many companies are avoiding status determinations altogether?

Well, I kinda thought that an incorrect SDS carried liability for the party making the decision. What you're saying though makes me wonder why clients are reluctant to say "outside" if it's the agency who has the liability for the clients decision?

Like I said, liability potentially reaches every part of the supply chain above the contractor’s PSC. It initially rests with the Fee Payer, once the SDS has been passed on, as I described above, but any debts can be transferred up the supply chain if they cannot be recovered from the Fee Payer within a reasonable timeframe.

I get that liability can be transferred, but I thought that was if the SDS wasn't followed. I struggle to see why an agency recieving an outside SDS who then processes the payments gross can be liable?

I can see the point of the agency didn't receive an SDS or didn't follow it correctly, but having liability for processing it correctly seems really odd.

The only risks to your PSC (and you) now are contractual clauses to indemnify and fraud and really only the former. Will these contractual clauses work? Arguably not (but they might).

I'm not sure I'll agree to an indemnity - will see what QDOS say I guess


And there was be thinking I was home and dry!

Thanks for your comments

[jamesbrown]

I also wouldn’t overstate this risk. Afterall, HMRC can barely win an IR35 case on a good day. Now the entire supply chain is singing from the same sheet. There is really very little value in pursuing such cases, absent fraud. But, yes, the Fee Payer is ordinarily liable when an SDS has been compiled with reasonable care and is subsequently found wrong.

[GhostofTarbera]

Oh Lord.

If indeed James, you are right, (no reason to think otherwise), I cannot see why any right thinking entity would ever want to hire a contractor again.

.

BINGO


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