Are IR35 indemnity clauses imposing OPW liability on contractors, worth the paper they’re printed on?

Amid contractors quite rightly observing that they too are often on the receiving end of nasty-sounding IR35 indemnity clauses, from parties trying to contract-away their liability under the off-payroll working rules, it seems a liability clarification is needed, writes Nikola Nowak, tax consultant at Markel.

Where we are now with the off-payroll rules, as 2024 dawns

Before that clarification let’s first establish where we are, on the eve of 2024. The off payroll working rules (Part 2, Chapter 10 ITEPA 2003) have caused turmoil and confusion in the contracting landscape since the legislation came into force.

That being said, the OPW rules have been in place in the public sector for over six years and the private sector for over two years, so one might think end-clients and recruitment agencies would be ‘all over’ them by now, knowing intricately how they are and what obligations they impose on each party in the chain. What’s clear, at least from HMRC’s perspective, is failing to comply with the OPW rules (in either sector) could lead to penalties.  


Before delving deeper, please be aware that this article considers only the basics of this complex legislation.

It is impossible to cover every situation and every variable and it’s important to know the actual position will depend on the specific circumstances of the case.  

Firstly, let’s understand the three definitions that the off-payroll working legislation uses:  

  1. Decision-maker -- this is the end-client i.e. the party which receives the services undertaken by the worker.  
  1. Fee-payer -- this is the often the agency;  but technically-speaking, it’s the entity that pays the intermediary.   
  1. Intermediary -- this is the entity, typically a limited company (but potentially a partnership) which sits between the worker and the fee-payer.  

A common contractual chain looks like this: 

Limited company contractor à Company 1 (fee-payer)à Corporation 1 (decision-maker)  

Each party has distinct obligations. But…

Obligations: Which parties must do what under the IR35 rules

The legislation places the onus of determining the status of the engagement on the decision-maker. So unless the decision-maker is exempt (under the ‘small companies exemption’), they have to consider IR35; create a Status Determination Statement (SDS) and pass this onto the worker.  

The fee-payer is obliged to enforce the determination to the worker’s income. If the SDS states that the engagement is inside IR35, the fee-payer must make the relevant tax and NIC deductions. The fee-payer is also the entity that HMRC would pursue for any tax liabilities, should there ever be any, unless it is proven that the client has not taken “reasonable care” in its decision-making process.  

What is the contractor liable for? 

Under Chapter 10 rules, the contractor does not hold any IR35 related liabilities (unless in rare cases of fraud or collusion by manipulating the outcome of the SDS).  

As mentioned at the outset, we are aware of practices in the industry whereby the contractor is required to ‘insure’ the agency or the end-client against the off payroll working rules, and in some cases are told that without this insurance in place, the relevant assignment will not be deemed as outside IR35. However, under Chapter 10, HMRC would simply not pursue the contractor.  

Our view is that the contractor does not have an “insurable interest” i.e. where the contractor purchases tax losses cover, the contractor is ‘insured’ against a risk held by another party.  

What do indemnity clauses which contractors say they’re forced to sign actually state? 

It is common for agencies and end-clients to insert indemnity clauses into the contract which might have the following wording: 

“The Company undertakes to indemnify the Agency and the Client against any and all liability, loss, damage, costs and expenses incurred or suffered by the Agency and/or the Client which arise as a result of, in consequence of, or otherwise in connection with the Off-Payroll Working Rules.” 

Are OPW/IR35 indemnity clauses worth the paper they’re printed on?

These are commercial clauses which we have not yet seen tested in a court of law in respect of the off-payroll rules.

It is arguable whether they are enforceable as the purpose and intention of the HMRC legislation is to increase compliance by moving the liability up the contractual chain. It would be entirely counterproductive to the legislation if a business could bypass its tax obligations by inserting a commercial clause into their contracts.  

Beyond this, HMRC would seek to recover tax liabilities from the fee-payer, or the end-client where “reasonable care” has not been taken in issuing an SDS, as per the legislation.

But to recover these costs from the contractor, the fee-payer would have to file a civil suit against the intermediary after the loss has been suffered. In short, indemnity clauses do not automatically impose any consequences for the contractor.  

Outsourced provision 

Elsewhere in the market, the entity that is the end-client has been seen changing where there is provision of genuinely outsourced services – or managed services. 

Taking the contractual chain above, if Company 1 in the chain was providing a genuine managed service to Corporation 1, Company 1 would become the end client. And if Company 1 is a medium/large sized entity, Chapter 10 would apply and they will become decision-maker and fee-payer.  

If Company 1 is exempt by way of being a ‘small company,’ then the ‘old’ IR35 rules (Chapter 8) would apply, and the contractor would become responsible for their IR35 status.  

Hypothetically, if Company 1 deems itself an outsourced provider and some years down the line HMRC finds this to not be the case, Corporation 1 would be in trouble. They will have failed to meet their Chapter 10 obligations (namely making a decision and providing an SDS), so would assume all the liabilities. Again though, this would not fall to the contractor.  

Standing back from the detail, here’s our take on IR35 indemnity clauses...

While we understand that it’s in every business’ best interest to reduce or eliminate IR35/OPW liabilities, it is not possible to circumvent tax legislation through contract arrangements or contract wording.

That is to say – you cannot contract out of a legal obligation. Admittedly, it is not entirely outside the realm of possibility that a court could uphold a commercial clause passing the liabilities to the contractor. 

The most prudent way to minimise risk is through compliance – or if you prefer a ‘belt and braces’ approach, with insurance for the fee-payer. As always, written contracts have to be checked to make sure they reflect the working practices and that they truly demonstrate the relationship that the parties intended to create.  

Final warning

If every party in the chain complies with their obligations, this drastically reduces the risk of an adverse finding by HMRC. Merely passing obligations back down the chain, however, may come back to haunt you in the future.

Tuesday 12th Dec 2023
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Written by Nikola Nowak

Nikola started her journey with Markel Tax in 2017 as an office administrator working within numerous areas of Markel’s business including dealing with client schemes, contract reviews and the Survive35 TaxSafe product. Nikola joined the contractor solutions team in 2019, where she gained a deep understanding of the contracting industry - specifically IR35 legislation, employment status and the agency legislation. She currently deals with all types of IR35 issues, CIS and handles HMRC enquires, and now advises all types of clients and accountants in these areas.

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