Indemnification clause

[webberg]

I used to draft "tax contest" letters that were part of commercial agreements.

These basically envisaged scenarios in which one party required the other to take certain actions, such as going to a FTT or UTT - at their own cost or perhaps at shared cost - in order to defend the tax effects that had been factored into the cost of the finance. (I worked in a bank).

In doing so, the start point was that following an initial enquiry from HMRC, the parties agreed that HMRC was incorrect or that there was at least a 75% chance of that.

So almost immediately we are into subjective tests. We, the bank, may decide that we had to challenge an adverse decision on the grounds that we perhaps had a book of similar deals using the same effect. Equally we might decide that the contract used a relatively little used device and that the reputation of the bank would suffer if we defended the situation, regardless of whether we thought we would win.

The other side of the deal would have had similar issues to weigh.

Even where matters of policy allowed consideration of taking or defending an enquiry, it was entirely possible that there were differing views as to the tax effect of a particular item under challenge. To try to provide some certainty (or to limit the areas of uncertainty), some tax issues were agreed between the parties in advance.

Especially noted were those areas in which bank and customer were responsible for the tax effects on their own book.

For example, the bank may consider that an asset was not a long life item (allowing faster tax depreciation) whereas the customer would usually consider it was a long life asset. That item would not be part of a tax contest. If that was challenged, it would be bank's sole decision and cost.

Why is this relevant?

Because you entered a contract and negotiated the terms and based on the role you did and the way it was documented, you made a decision about whether you were inside or outside IR35.

The end client had no say in that decision.

Why then would they be prepared to risk reputation and financial cost to join a defence or indemnify you for the costs of losing a decision that they have no say in?

I get that there may mitigating circumstances if the project if close to completion but are they enough for them to risk an open ended cost?

Would a charity - which benefits from generous tax breaks - really want to be in Tribunal admitting that it colluded with another in order to extract yet more tax advantage?

I wish you luck in attempting this, but don't be surprised if you are blanked.

[Paralytic]

Indeed that is an option. I'll still post though. If it annoys you, go and have a walk and breath of fresh air.

It doesn't annoy me - I was simply trying to help. If that annoys you, then don't ask for feedback.

But, given your couldn't differentiate between a project and a role being Inside IR35, then blindly using a clause someone provides here would be a huge risk. I stand by my thought that you should pay for some legal clauses if you want to go down that route.

[WordIsBond]

Project ends Feb 2020. Given a history of overruns, it would surprise me if it doesn't go beyond that.

Contract is until end Dec 2019.

If extended, I'm thinking of an indemnification clause.

'Agency[ClientCo] fully indemnifies ContractorCo against improper and incorrect assumptions of inside IR35 status and all additional taxation that may apply for the duration of the engagement in consequence.'

I'm fully prepared to walk, so this can be as hardline as it needs to be. However not too sure about this wording. Or maybe

'ClientCo here asserts that project X is considered to be completely outside IR35. ClientCo fully indemnifies ContractorCo against any additional taxation arising from ClientCo's later re-assessment of this status, for the entire duration of the engagement.'

1. Extend until February. Insert a clause:
'As all payments on this contract will be completed before 6 April 2020, Client will be making no IR35 determination on this contract under pending legislation.'

2. In February, if they want to extend again, only agree to if they make an outside determination.

Sorted.

If later, they make an inside determination, having first made an outside determination, that will be an implicit statement that working practices have changed, and you can walk. They are unlikely to do that because it will be creating liability for themselves. More likely, if they want to draw a line under it they will do something like 'umbrella only' (no determination at all). Again, you can walk at that point.

[cojak]

I'm not sure if those clauses would wash in a court of law as they could be viewed as 'unreasonable' and not in accordance with legislation.

I wouldn't like to be the contractor in that position though...

[zerosum]

In that case, why the need for the clause?

And, by any chance, does a similar role appear at the start of the next project? Just because a role within a single project goes away, it does not mean it has to be outside IR35.

As with most times I post, I'm also trying to find holes and weaknesses in my own thinking or that of others. Not convinced I suggested that because the role is coterminous with the project, it's necessarily outside IR35 -- I added this as context. Indeed, if they have another identical project after I leave with similar roles, that will be a blow. Thanks for that.

If you do want some legal wording, i'd suggest you speak to a legal person, not some random people on the internet.

Indeed that is an option. I'll still post though. If it annoys you, go and have a walk and breath of fresh air.

[Paralytic]

In this case, it's a charity that outsources everything. Determining their contractors are inside would be absurd and a 'don't bother us with this nonsense' approach.

In that case, why the need for the clause?

The role only exists for the lifetime of the project.

And, by any chance, does a similar role appear at the start of the next project? Just because a role within a single project goes away, it does not mean it has to be outside IR35.

If you do want some legal wording, i'd suggest you speak to a legal person, not some random people on the internet.

[zerosum]

Maybe but they aren't going to agree to this for exactly that point. It's not the project either. It's the role so the wording is pointless.

No client is going to tie themselves to that level of risk just for one contractor.

I've worked with clients in the past where I'd agree with you 100%.

In this case, it's a charity that outsources everything. Determining their contractors are inside would be absurd and a 'don't bother us with this nonsense' approach.

The role only exists for the lifetime of the project.

I'm just trying to nail this down in the legalese.

If they want to throw a hissy fit, they can find someone else to finish their project 2m from go-live. Best of luck.

I'd say the risks in both cases are about equal.

[northernladuk]

'Duration of the engagement' -- because it started in November 2018. But yes, good point, claims should not be limited in time.

Role on the project, i.e. delivery of one subsystem. Yep fair.

With the overcomplication point; isn't the whole issue that the client can change their mind? I want them to declare it outside and then if they change their mind, that is firmly their problem not mine.

Maybe but they aren't going to agree to this for exactly that point. It's not the project either. It's the role so the wording is pointless.

No client is going to tie themselves to that level of risk just for one contractor.

[zerosum]

What if HMRC come calling after the engagement ends? Might actually be more likely than it happening during 2019.

Projects aren't inside/outside IR35 - roles are.

I suspect you're overcomplicate this. Either get them to declare you outside or walk.

'Duration of the engagement' -- because it started in November 2018. But yes, good point, claims should not be limited in time.

Role on the project, i.e. delivery of one subsystem. Yep fair.

With the overcomplication point; isn't the whole issue that the client can change their mind? I want them to declare it outside and then if they change their mind, that is firmly their problem not mine.

[Paralytic]

'Agency[ClientCo] fully indemnifies ContractorCo against improper and incorrect assumptions of inside IR35 status and all additional taxation that may apply for the duration of the engagement in consequence.'

What if HMRC come calling after the engagement ends? Might actually be more likely than it happening during 2019.

'ClientCo here asserts that project X is considered to be completely outside IR35. ClientCo fully indemnifies ContractorCo against any additional taxation arising from ClientCo's later re-assessment of this status, for the entire duration of the engagement.'

Projects aren't inside/outside IR35 - roles are.

I suspect you're overcomplicate this. Either get them to declare you outside or walk.

[zerosum]

Project ends Feb 2020. Given a history of overruns, it would surprise me if it doesn't go beyond that.

Contract is until end Dec 2019.

If extended, I'm thinking of an indemnification clause.

'Agency[ClientCo] fully indemnifies ContractorCo against improper and incorrect assumptions of inside IR35 status and all additional taxation that may apply for the duration of the engagement in consequence.'

I'm fully prepared to walk, so this can be as hardline as it needs to be. However not too sure about this wording. Or maybe

'ClientCo here asserts that project X is considered to be completely outside IR35. ClientCo fully indemnifies ContractorCo against any additional taxation arising from ClientCo's later re-assessment of this status, for the entire duration of the engagement.'