IR35 Liability transfer

[jamesbrown]

The client will fight this very hard... They may think they have indemnity in their back pocket but that's only as good as the supply chain.

It depends. An alternative take is that they won't fight it very hard because it's expensive to fight, especially if they can claw it back in the usual way that PAYE errors are fixed. Consider the parallel in employment whereby an employer doesn't need to do anything special to fix a PAYE error that results in an employee having insufficient tax deducted. It is simply fixed and the employee is liable (in law and in reality).

[Lance]

It depends. An alternative take is that they won't fight it very hard because it's expensive to fight, especially if they can claw it back in the usual way that PAYE errors are fixed. Consider the parallel in employment whereby an employer doesn't need to do anything special to fix a PAYE error that results in an employee having insufficient tax deducted. It is simply fixed and the employee is liable (in law and in reality).

I doubt it will be that easy..

Let's say client A has been running outside IR35 for, let's say, 3 years.
Probably half of those contractors have gone.

Trying to clawback via PAYE isn't going to be possible for the contractors who left.
And for the ones that are still there, there could be 6-9 months of contractor bills to cover 3 years of missing IT/NIC/etc. How many of those contractors are going to stick around through a clawback process of months? None of them. Leaving the client having to chase agencies via indemnity clauses that might not stand up in court anyway.
Easier to fight HMRC about the determination IMO.

[Maslins]

It depends. An alternative take is that they won't fight it very hard because it's expensive to fight, especially if they can claw it back in the usual way that PAYE errors are fixed. Consider the parallel in employment whereby an employer doesn't need to do anything special to fix a PAYE error that results in an employee having insufficient tax deducted. It is simply fixed and the employee is liable (in law and in reality).

If I understand what you're saying, I agree that logic holds if HMRC challenge fairly swiftly, so the contractor's still working there, and liability isn't huge. Just deduct from what you'd otherwise pay them.

However, don't these things typically take years to be challenged/resolved? If so, I'd expect:
1) most contractors (perhaps you'd argue not the ones most at risk, the permitractors who stay at the same place for decades) have likely moved on, working elsewhere,
2) the liability's going to be massive, as for perhaps a couple of years worth of work. Therefore likely won't be feasible to just deduct it from the next month's invoice payment.

EDIT - ie what Lance said a minute before me :-)

[Keanu2020]

I reflect a bit on what I went through, when an outside role was switch to inside. With no engagement or conversation with me, the agency just change the whole arrangement from company to company to company to employee. They put a return in to HMRC, put me down with a BR code, and I had an unexpected tax bill and no way to revert what happened. HMRC even advised this and backed what happened as the right approach.

It is messy, i agree, and so much unproven. But recruitment agents / middlemen won't want cost or work if they can just unilaterally change the arrangement and move tax bill elsewhere. Add in the liability transfer clause and two route to pass the tax bill on start to appear. (I get its never quite this simple though and will surely be some work for the laywers).

[jamesbrown]

I doubt it will be that easy..

If I understand what you're saying, I agree that logic holds if HMRC challenge fairly swiftly, so the contractor's still working there, and liability isn't huge. Just deduct from what you'd otherwise pay them.

This is all a bit speculative, TBH. But I think there are two possible angles for recovery of underpaid tax from the contractor and I'm really only trying to identify them, more than push for either one as most likely to succeed or fail.

I think it's important to distinguish between the legal position (i.e., where the debt falls, ultimately) and the mechanics of collection, which may be difficult in all cases, but doesn't change the legal position.

One angle is contract law, i.e., the enforcement of clawback clauses. In principle, these could work, but they cannot transfer liability to an individual when a company has disappeared, unless the clauses purport to do this. It's unclear whether these clauses will work, but they could work if properly drafted. The mechanics of collection is that the debt would arise on the contractor's company and would be enforced through the usual routes for collecting commercial debts with no involvement of HMRC. If the contractor still works for the client and the Fee Payer holds outstanding funds, greater than the liability, then the route to collection is obvious/simple, but that may be only a fraction of cases.

The context here is that HMRC believes the Fee Payer should seek any underpaid tax from the contractor when the client changes their position regarding IR35 status.

The second angle is that PAYE debts can be recovered from an employee when their employer has made a PAYE error. If the employee has left their employment, that liability doesn't change, they remain liable. The mechanics of collection here is that the employer can fix the error in simple cases (e.g., the employee is still under their employment), but HMRC can otherwise issue a direction. However, directing the employee to pay these PAYE debts requires that the employer took "reasonable care" and acted in "good faith":

https://assets.publishing.service.go...ction-paye.pdf

I'm just highlighting these as two possible angles. No one here knows how this will play out. The intention of the legislation is that the Fee Payer is liable in the first instance, assuming a timely SDS was issued and with reasonable care (and this can be changed up to the moment the client makes the first payment in respect of the services).

[eek]

The second angle is that PAYE debts can be recovered from an employee when their employer has made a PAYE error. If the employee has left their employment, that liability doesn't change, they remain liable. The mechanics of collection here is that the employer can fix the error in simple cases (e.g., the employee is still under their employment), but HMRC can otherwise issue a direction. However, directing the employee to pay these PAYE debts requires that the employer took "reasonable care" and acted in "good faith":

https://assets.publishing.service.go...ction-paye.pdf

I'm just highlighting these as two possible angles. No one here knows how this will play out. The intention of the legislation is that the Fee Payer is liable in the first instance, assuming a timely SDS was issued and with reasonable care (and this can be changed up to the moment the client makes the first payment in respect of the services).

Worth saying that we've seen 1 example of the second angle being used.

And it makes sense as it minimizes the total cost to the fee payer to just the NI costs - the Fee payer pays the Employer and Employee NI on the amount received and the income tax is left as an argument between HMRC and the contractor to fight over.

See why I'm happy to just have a well paid 100% remote inside IR35 contract.

[Fred Bloggs]

I am unsure this will ever be tested in court. Myself, I think there's every chance of the clause being an unfair contract. This is the legislation that I think would effectively trump any attempt to transfer statutory liability to a contractor.

The Unfair Contract Terms Act (UCTA) 1977 regulates contracts by limiting the extent to which one party can avoid liability through use of exclusion clauses such as disclaimers. It applies to exclusion terms within the majority of contracts, including notices that would bring into existence contractual obligations.

There's no chance I will be a test case but if this ever came to court I think there is every chance the liability transfer clauses would be ruled unfair.

Link -

https://www.legislation.gov.uk/ukpga/1977/50

[jamesbrown]

Worth saying that we've seen 1 example of the second angle being used.

And it makes sense as it minimizes the total cost to the fee payer to just the NI costs - the Fee payer pays the Employer and Employee NI on the amount received and the income tax is left as an argument between HMRC and the contractor to fight over.

See why I'm happy to just have a well paid 100% remote inside IR35 contract.

Exactly. I wouldn't touch a contract under Chapter 10.

[Lance]

The second angle is that PAYE debts can be recovered from an employee when their employer has made a PAYE error. If the employee has left their employment, that liability doesn't change, they remain liable. The mechanics of collection here is that the employer can fix the error in simple cases (e.g., the employee is still under their employment), but HMRC can otherwise issue a direction. However, directing the employee to pay these PAYE debts requires that the employer took "reasonable care" and acted in "good faith":

this is a good point, and I have seen it used for permies....

But for an outside contractor, who was never an employee, trying to apply employee rules AFTER they have left, seems far fetched and I doubt it would get through court.
IANAL

[jamesbrown]

I am unsure this will ever be tested in court. Myself, I think there's every chance of the clause being an unfair contract. This is the legislation that I think would effectively trump any attempt to transfer statutory liability to a contractor.

[/I]

There's no chance I will be a test case but if this ever came to court I think there is every chance the liability transfer clauses would be ruled unfair.

Link -

https://www.legislation.gov.uk/ukpga/1977/50

The commercial terms can be drafted in a way that doesn't seek to override any particular legislation, but I agree that this is a tricky route for a Fee Payer. The first difficulty for the Fee Payer is that they must have already incurred the tax loss, i.e., paid all taxes owed, and they will definitely not be able to recover any ErNI through this route. However, at this point, everyone's a loser. You fight HMRC and it probably costs you more in legal fees than the debts owed or you accept the situation and seek to recover as much as you can. Just bear in mind that there are legitimate legal opinions either way on this issue, assuming well drafted clauses and a roughly equal balance of power between the parties who acted in good faith. Courts generally don't like to set aside terms agreed under these circumstances, but it's also clear that commercial terms cannot override legislation. Naturally, if the contractor supplied any incorrect information that contributed to the SDS decision, they would be in trouble.