Reply to: Qdos 42 questions - IR35 Assessment: Has anyone done it already?

[jamesbrown]

However, as someone who typically takes a risk averse approach, I'm most likely to avoid any contract which has liability transfer clauses in full stop.

And, yes, that is the best strategy to mitigate risk, other than avoiding UK clients.

[jamesbrown]

I wasn't aware of HMRC being in a position to use commercial contract terms between say my limited and a fee payer in order to pursue a debt they have with said fee payer

They can’t. They will only pursue your company directly under Chapter 8 or under Chapter 10 when there is evidence of fraud. The bigger risk under Chapter 10 is from the client reclassifying status before the first payment to the Fee Payer and closing your company probably isn’t going to reduce that risk. Again, I don’t think it works as a strategy for mitigating the biggest risks, but there is no law against opening/closing companies to carry on the same trade, except in specific circumstances.

[ShandyDrinker]

Eitehr way, it's a terrible idea.

They can only operate within the legislative framework available. Outside of the MSC legislation, it's actually very hard to transfer a debt to an individual. If due diligence has been performed for IR35, it's essentially impossible in that context. Closing a business to mitigate risk is perfectly fine (insofar as it works). As long as no debts or taxes are being avoided (and HMRC has an opportunity to test this upon closure, which is the real reason I don't think it necessarily works), then there is really no problem. Again, it is not a strategy I would adopt - I would prefer to mitigate risk by not dealing with UK clients - but closing/opening companies is not legislated against, except when avoiding debt or taxes (and HMRC must be notified and can object). The TAAR is a completely separate issue and not relevant unless a capital distribution was obtained.

I'm unlikely to be doing this but I don't necessarily think it's a terrible idea. The liability rests with the fee payer and not the contractor's limited. Sure, fee payer may have clauses to pursue the limited but if it is already closed then they are on a hiding to nothing. Even if they, as NLUK says, lift the corporate veil, I wasn't aware of HMRC being in a position to use commercial contract terms between say my limited and a fee payer in order to pursue a debt they have with said fee payer.

However, as someone who typically takes a risk averse approach, I'm most likely to avoid any contract which has liability transfer clauses in full stop.

[jamesbrown]

Maybe but it won't work. The can lift the corporate veil because the change in company has been done just to avoid liabilities so if the worst did come to pass they can see through the sham of changing companies and go for the director personally.

Eitehr way, it's a terrible idea.

They can only operate within the legislative framework available. Outside of the MSC legislation, it's actually very hard to transfer a debt to an individual. If due diligence has been performed for IR35, it's essentially impossible in that context. Closing a business to mitigate risk is perfectly fine (insofar as it works). As long as no debts or taxes are being avoided (and HMRC has an opportunity to test this upon closure, which is the real reason I don't think it necessarily works), then there is really no problem. Again, it is not a strategy I would adopt - I would prefer to mitigate risk by not dealing with UK clients - but closing/opening companies is not legislated against, except when avoiding debt or taxes (and HMRC must be notified and can object). The TAAR is a completely separate issue and not relevant unless a capital distribution was obtained.

[northernladuk]

As long as the company was not indebted (i.e., insolvent and the business moved to a new company, which is the traditional meaning of phoenixing), the director is not disqualified and there were no capital distributions subject to the TAAR (the other, more recent/specific, meaning), I don't see any issues with this. Opening and closing companies is perfectly fine. Whether (or how much) it mitigates risk is another question entirely. In some ways, it probably increases risk because it gives HMRC a decision point to investigate/object to closure. Also, one of the biggest risks with Chapter 10 is that the client changes their assessment before the first payment is made to the Fee Payer (so your contract and company would most likely be live).

Maybe but it won't work. The can lift the corporate veil because the change in company has been done just to avoid liabilities so if the worst did come to pass they can see through the sham of changing companies and go for the director personally.

Eitehr way, it's a terrible idea.

[jamesbrown]

You'd fall foul of phoenixing as you are opening and closing for no business reason except to escape your liabilities which is exactly what the anti-phoenixing rules are in place for.

As long as the company was not indebted (i.e., insolvent and the business moved to a new company, which is the traditional meaning of phoenixing), the director is not disqualified and there were no capital distributions subject to the TAAR (the other, more recent/specific, meaning), I don't see any issues with this. Opening and closing companies is perfectly fine. Whether (or how much) it mitigates risk is another question entirely. In some ways, it probably increases risk because it gives HMRC a decision point to investigate/object to closure. Also, one of the biggest risks with Chapter 10 is that the client changes their assessment before the first payment is made to the Fee Payer (so your contract and company would most likely be live).

[northernladuk]

It does look like the only strategy in the longer term is going to be setting up a new company for every contract and then close it as soon as the contract has been completed. I'm sure this has been discussed at length elsewhere on here though.

You'd fall foul of phoenixing as you are opening and closing for no business reason except to escape your liabilities which is exactly what the anti-phoenixing rules are in place for.

[ShandyDrinker]

Oh there was nothing wrong in what you wrote - my post was there to emphasis why these clauses exist and why agencies need them so badly.

It does look like the only strategy in the longer term is going to be setting up a new company for every contract and then close it as soon as the contract has been completed. I'm sure this has been discussed at length elsewhere on here though.

[eek]

I do somewhat play devil's advocate with my original reply to this thread but stand by what I wrote.

However, you're absolutely right in what you say and I do understand the predicament of the agencies. However, the legislation is iniquitous as it will always be the party with the least power in the chain that gets screwed, namely the contractor and their limited.

The reality on the ground is that HMRC only ever intended a max tax grab and not the right tax. If it is such that the end client should ultimately be responsible for the determination, any liability should rest with them for perceived problems with the determination.

I will confess to being jaded by the whole thing after years of this bulltulip and am looking forward to retiring or scaling back the contracting work I take as soon as I possibly can.

Oh there was nothing wrong in what you wrote - my post was there to emphasis why these clauses exist and why agencies need them so badly.

[ShandyDrinker]

Look at it from the agency side - the fee payer is repsoble for the PAYE tax of an inside IR35 worker.

So assume agency payment of £10,000 and tax at 50%.

recover the £10,000 from the contractor and the agency ca. deduct £5,000 as a deemed payment, return £5,000 to the worker and the cost to the agency is zero.

fail to recover that £10,000 and HMRC will start asking the agency to pay the tax due on a post tax payment of £10,000. Which means the cost to the agency is £10,000.

thats a hell of incentive to enforce a claw back clause.

I do somewhat play devil's advocate with my original reply to this thread but stand by what I wrote.

However, you're absolutely right in what you say and I do understand the predicament of the agencies. However, the legislation is iniquitous as it will always be the party with the least power in the chain that gets screwed, namely the contractor and their limited.

The reality on the ground is that HMRC only ever intended a max tax grab and not the right tax. If it is such that the end client should ultimately be responsible for the determination, any liability should rest with them for perceived problems with the determination.

I will confess to being jaded by the whole thing after years of this bulltulip and am looking forward to retiring or scaling back the contracting work I take as soon as I possibly can.

[jamesbrown]

Thanks, James.

Indeed, I appreciate that the liability sits with the fee-payer, but if the fee payer is unwilling to accept the risk, could an indemnity for that not be passed up as well as down the supply chain?

I think that perhaps it goes down the supply chain because a contractor LtdCo has the least 'power' in the relationship.

In principle, a contract can say anything that is lawful but, as you say, there is a power dynamic and this is reinforced by the Chapter 10 legislation itself and, further, by HMRC guidance, which points to the PSC as fair game for recovery. Ultimately, HMRC doesn’t really care about commercial arrangements (or even what the legislation intended) and they often cite commercial arrangements as an excuse. Some insurers purport to insure the supply chain as a whole, but the power ultimately lies with the money in terms of contractual arrangements, i.e. the client.

[Protagoras]

No, the Fee Payer is liable in the first instance. The client is merely responsible for issuing a timely SDS with reasonable care.

Thanks, James.

Indeed, I appreciate that the liability sits with the fee-payer, but if the fee payer is unwilling to accept the risk, could an indemnity for that not be passed up as well as down the supply chain?

I think that perhaps it goes down the supply chain because a contractor LtdCo has the least 'power' in the relationship.

[jamesbrown]

I've often wondered why an agency would not have an indemnity in their contract with the client (rather than the contractor LtdCo)? Or perhaps they do and it doesn't get mentioned?

After all, it's the client who is responsible for the determination, and the client who would be HMRC's first port of call if investigating.

No, the Fee Payer is liable in the first instance. The client is merely responsible for issuing a timely SDS with reasonable care.

[Protagoras]

I've often wondered why an agency would not have an indemnity in their contract with the client (rather than the contractor LtdCo)? Or perhaps they do and it doesn't get mentioned?

After all, it's the client who is responsible for the determination, and the client who would be HMRC's first port of call if investigating.

[eek]

Look at it from the agency side - the fee payer is repsoble for the PAYE tax of an inside IR35 worker.

So assume agency payment of £10,000 and tax at 50%.

recover the £10,000 from the contractor and the agency ca. deduct £5,000 as a deemed payment, return £5,000 to the worker and the cost to the agency is zero.

fail to recover that £10,000 and HMRC will start asking the agency to pay the tax due on a post tax payment of £10,000. Which means the cost to the agency is £10,000.

thats a hell of incentive to enforce a claw back clause.