One of those pesky indemnity clauses...

[sspt27]

Hi all

(repost as previous attempt errored for some reason)

Been lurking here for a while, as there's a lot of useful info going on. I've especially been reading recent IR35 info: I had my own LtdCo back in the late 90s/early 2000s, but the IR35 situation has changed a lot since then. Especially useful was that introductory "Be careful" sticky.

I started an "outside IR35" contract back in June, but went Umbrella because it was too much hassle to set up a LtdCo quickly. The idea was that I might go LtdCo on contract renewal. This does appear to be an as-genuine-as-possible Outside contract, with an SDS, all my colleagues aware that it's outside, working from anywhere.

Contract renewal has happened, but... reading through the contract, I found this "indemnity" clause, which made my hair stand on end:

If any person
should seek to establish any liability or obligation upon Employment
Business or upon Client on the grounds that Representative is an
employee or worker (or should be treated as such for the purpose of
employment rights, benefits and/or taxation) of Employment Business
or of Client, Contractor agrees to indemnify and hold harmless
Employment Business and/or Client and to keep Employment Business
and/or Client, as the case may be, indemnified in respect of any such
liability or obligation and any related (without limitation) costs,
expenses, legal expenses, proceedings, settlements or other losses
which Employment Business or Client incur.

(my emphasis).

I was also annoyed that I only saw this contract once I'd already set up the LtdCo.

So, after quite a bit of to-and-froing with the agent (and the client, who wanted me back soon), I've renewed on an Umbrella basis, with the understanding that I'd investigate the LtdCo option further and switch to that after a few weeks if I decide to.

What makes my hair stand on end
Sure I know that going LtdCo exposes me to certain risks. Among those is that HMRC will get all heavy with me, years down the line, find me actually inside IR35 and demand a whole load of tax. That's fine, I can deal with that, as long as it's my own judgment, behaviour and risk evaluation in charge. What seems utterly crazy about this clause is that the whole process appears to be completely outside my control. Rather than me dealing with HMRC if and when this happens, it seems that either the client or Employment Business could get the heavy treatment from HMRC, deal with it exactly as they like, incur legal costs if they feel like it, fight it all the way to the Galactic Court, lose... and then the first I'd hear of it would be a bill dropping through my letterbox: a bill far exceeding the actual tax HMRC were after.

My questions

1. As far as anyone knows, am I interpreting this clause correctly? (Everything I've researched indicates that no-one knows - or whether this kind of clause is even enforceable).

2. Has anyone here signed up to a contract with this kind of clause? What were your thoughts about it?

3. Kingsbridge claim to have insurance against this kind of thing, but I'm sceptical about its effectiveness. Among other things, it seems to be a contract between Kingsbridge and all 3 parties (LtdCo, Employment Business, client) - they'd have to agree to abide by its conditions, in particular about disclosing any possible HMRC problem to the insurer immediately, and handing over the conduct of the case to the insurer. Anyone have any opinions on this insurance?

I'm not committed either way: happy to go on on an Umbrella basis and leave my LtdCo dormant, if it seems that this is too much of a risk.

thanks!

[Fred Bloggs]

Well until it's tested in court I doubt anyone can advise you with any degree of certainty.

My own take is that one business cannot so easily delegate it's statutory responsibilities to another party. It would naturally follow then that any insurance against such an eventuality arising would be of questionable use. I do believe these clauses to be unenforceable as they are blatantly unfair contract terms. Unfair contract terms are not enforceable.

But until someone takes it right through the legal system to the very end, we're never going to know.

[eek]

3. Kingsbridge claim to have insurance against this kind of thing, but I'm sceptical about its effectiveness. Among other things, it seems to be a contract between Kingsbridge and all 3 parties (LtdCo, Employment Business, client) - they'd have to agree to abide by its conditions, in particular about disclosing any possible HMRC problem to the insurer immediately, and handing over the conduct of the case to the insurer. Anyone have any opinions on this insurance?

I'm not committed either way: happy to go on on an Umbrella basis and leave my LtdCo dormant, if it seems that this is too much of a risk.

thanks!

On point 3 - my concern wouldn’t be that I was found to be inside IR35, but that someone else was found to be inside at the end client and HMRC asked for all 732 other contractors to be treated the same way

[Lance]

I would not be too concerned where a contract is so badly written that it does not contain the word "the".
Or has that clause been paraphrased?


Anyway. As has been pointed out any IR35 tax liability transfer has yet to be tested in law.

I don't believe that a contract can transfer a liability from the end client to the contractor like this. Not when the liability is written into legislation.
And if they did try you would simply wind the company up (they know you'd do this anyway).

For my view it is unenforceable...... But it costs the agency nothing to add the clause, and worded as it is, it does give them some cover for other liabilities.

IANAL

[Fred Bloggs]

I would not be too concerned where a contract is so badly written that it does not contain the word "the".
Or has that clause been paraphrased?


Anyway. As has been pointed out any IR35 tax liability transfer has yet to be tested in law.

I don't believe that a contract can transfer a liability from the end client to the contractor like this. Not when the liability is written into legislation.
And if they did try you would simply wind the company up (they know you'd do this anyway).

For my view it is unenforceable...... But it costs the agency nothing to add the clause, and worded as it is, it does give them some cover for other liabilities.

IANAL

First move were it myself would be to say nothing, just strike the clause through, print, sign and send it back. I reckon there's no more than a evens chance anyone at the agency would either not notice or not care. I have got away with stuff like that on a number of occasions. The less you say the more you can get away with in my experience.

[eek]

I would not be too concerned where a contract is so badly written that it does not contain the word "the".
Or has that clause been paraphrased?


Anyway. As has been pointed out any IR35 tax liability transfer has yet to be tested in law.

I don't believe that a contract can transfer a liability from the end client to the contractor like this. Not when the liability is written into legislation.
And if they did try you would simply wind the company up (they know you'd do this anyway).

For my view it is unenforceable...... But it costs the agency nothing to add the clause, and worded as it is, it does give them some cover for other liabilities.

IANAL

The thing I would add is that I do expect this to be tested in law simply because of the way the law is written.

Suppose the end client is told the contract is inside. The contractor received £10,000 and the agency needs to pay the tax bill

That tax bill will be 2 very different figures

If recovered from the worker it's £0 and the tax paid is say £5000
If not recovered from the worker it's £10,000 or so and the tax paid is £10000

Now those figures are very rough estimates but they are only there to emphasis the reason why I wouldn't be happy with such a clause until we knew whether they are valid or not.

[sspt27]

Thank you, everyone, for your replies. Very helpful.

Of course, I was hoping someone would come out of the woodwork and say "Nah, don't worry, I saw this in my contract, thought about it and signed it - if it even happens, it's unenforceable". But then - even if someone did say that - it's my decision which I have to make myself.

But until someone takes it right through the legal system to the very end, we're never going to know.

Yes, that's the impression I get as well. Again, how can a law be so stupidly written, that it prompts people to put untested, legally grey-area clauses in contracts? I thought IR35 Original Flavour was bad - seems that Son Of IR35 has only upped the stupidity.

First move were it myself would be to say nothing, just strike the clause through, print, sign and send it back. I reckon there's no more than a evens chance anyone at the agency would either not notice or not care. I have got away with stuff like that on a number of occasions.

Nice idea! Unfortunately I already raised it as a problem, so that's not possible in my case.

I would not be too concerned where a contract is so badly written that it does not contain the word "the".
Or has that clause been paraphrased?
[snip]
For my view it is unenforceable...... But it costs the agency nothing to add the clause, and worded as it is, it does give them some cover for other liabilities.
IANAL

I read the absence of "the" as legal language, or a certain style of "hey look at me, I'm a legal person, don't mess with me" language.

About the reasoning behind the clause, your impression was one of my impressions too: especially as the agent knew nothing about this clause, saying it was a "standard" contract from their outsourced legal service, which no-one had ever questioned before. Possibly the lawers themselves have just shoved that clause in and hoped, for the sake of doing something. They don't know whether it's enforceable any more than you or I do.

On point 3 - my concern wouldn’t be that I was found to be inside IR35, but that someone else was found to be inside at the end client and HMRC asked for all 732 other contractors to be treated the same way

Yes, that's a point I thought about: relevant as this is a big client with lots of contractors. Puts the (possible, eventual) change of determination even more outside my control.

Suppose the end client is told the contract is inside. The contractor received £10,000 and the agency needs to pay the tax bill

That tax bill will be 2 very different figures

If recovered from the worker it's £0 and the tax paid is say £5000
If not recovered from the worker it's £10,000 or so and the tax paid is £10000

Have to say I couldn't follow your reasoning here. Maybe because I'm not sure what "it" (which can be £0 or £10k) refers to?

Tomorrow I'm going to see if I can have a chat with another contractor (LtdCo) at the client - my closest colleague has already offered to put me in touch with someone - and see what they think of it, given that their contract will be identical. Will let you know if I hear anything useful.

thanks again!

[eek]

Have to say I couldn't follow your reasoning here. Maybe because I'm not sure what "it" (which can be £0 or £10k) refers to?

Tomorrow I'm going to see if I can have a chat with another contractor (LtdCo) at the client - my closest colleague has already offered to put me in touch with someone - and see what they think of it, given that their contract will be identical. Will let you know if I hear anything useful.

thanks again!

The £0 is what the agency pays if the claw back clause works - contractor pays back the £10,000 agency then sends £5000 to HMRC and whats left to the work as a deemed payment.,
The £10,000 is what the agency pays if they are unable to claw back the money - the £10,000 you were paid is treated as a deemed post tax payment and they need to pay the appropriate amount in tax that makes that £10,000 post tax income....

[Lance]

I read the absence of "the" as legal language, or a certain style of "hey look at me, I'm a legal person, don't mess with me" language.

About the reasoning behind the clause, your impression was one of my impressions too: especially as the agent knew nothing about this clause, saying it was a "standard" contract from their outsourced legal service, which no-one had ever questioned before. Possibly the lawers themselves have just shoved that clause in and hoped, for the sake of doing something. They don't know whether it's enforceable any more than you or I do.

Use of the definite article in legal language is perfectly normal.
The only place it's not normal (to the best of my knowledge) is in Indian English. This is not a correct language by any stretch but can be common.

I would suspect that the outsource legal service is using people to whom English is a second language and the Indian English has crept in. It is not correct IMO, but may well still be fine from a legal perspective as long as the language is clear around meaning.

Neither make it more or less enforceable, just more obvious that it was not drawn up correctly.