Reply to: Liability Transfer When SDS Is Outside

[jamesbrown]

I've now officially received an 'Outside SDS' and the Agency issued a new contract with the indemnity in it.

In layman's terms, the indemnity says that MyCo will indemnify the client, agency and Payroll Provider from all Tax / NIC claims by any third party, including the defence costs.

Naturally, I've declined to agree to that, however the Agency will not budge and have now provided their final position of "take it or leave it".

Now I know I'm lucky to have an outside contract, but this is just too wide to accept, right? Am I being over paranoid here or am I right to think about potentially giving up an outside contract?

On the one hand I can see the argument it's little different to the situation today, but on the other the actual laws have changed so why would I accept another business's potential liability when I no longer legally have to?

It's a tricky one but, on balance, I would be inclined to accept if you don't have (or expect to have) plenty of other options. If you're niche, in demand, walk. Otherwise, give it a second thought because these indemnity clauses are unlikely to work in practice and remember that YourCo is not you personally (assuming the indemnity is definitely written that way). If there is no money in YourCo, they're **** out of luck. It's really just a comfort blanket for the supply chain, but it's more Emperor's New Clothes than comfort blanket, IMHO. Either way, if you do proceed, get a commercial review.

[DrStrange]

I've now officially received an 'Outside SDS' and the Agency issued a new contract with the indemnity in it.

In layman's terms, the indemnity says that MyCo will indemnify the client, agency and Payroll Provider from all Tax / NIC claims by any third party, including the defence costs.

Naturally, I've declined to agree to that, however the Agency will not budge and have now provided their final position of "take it or leave it".

Now I know I'm lucky to have an outside contract, but this is just too wide to accept, right? Am I being over paranoid here or am I right to think about potentially giving up an outside contract?

On the one hand I can see the argument it's little different to the situation today, but on the other the actual laws have changed so why would I accept another business's potential liability when I no longer legally have to?

[Lance]

I don’t think so, because the statutory responsibility wouldn’t even be in question. I think the clauses would need to be examined and established as having the desired intent and having been entered into fairly, with eyes open, to put it colloquially. I think that last hurdle could be higher than anticipated. However, I’m obviously just a contractor, so YMMV, IANAL etc. Again, though, I think the big picture is that the risk to the contractor actually declines after April if you’re lucky enough to secure an outside contract.

Indeed. I have three....

[jamesbrown]

in that case, and if the agency took your CO to court to recover the money. Would your defence that this is the shifting of a statutory obligation be sufficient?

Of course if your CO could buy an insurance product that would pay, and everyone in the chain is happy with this it could be moot.
Although how this would work if HMRC found a client has mis-determined hundreds or thousands of contractors in one go I have no idea.

I don’t think so, because the statutory responsibility wouldn’t even be in question. I think the clauses would need to be examined and established as having the desired intent and having been entered into fairly, with eyes open, to put it colloquially. I think that last hurdle could be higher than anticipated. However, I’m obviously just a contractor, so YMMV, IANAL etc. Again, though, I think the big picture is that the risk to the contractor actually declines after April if you’re lucky enough to secure an outside contract.

[Lance]

Right, you cannot transfer a statutory responsibility. In other words, the debt absolutely would be paid by the supply chain in the first instance. The question is whether it could then be recovered as a matter of contract law and I think this part is sketchy (depends on the nature of the clauses and how they were entered into). Even if they were successful, the liability is limited, by design.

in that case, and if the agency took your CO to court to recover the money. Would your defence that this is the shifting of a statutory obligation be sufficient?

Of course if your CO could buy an insurance product that would pay, and everyone in the chain is happy with this it could be moot.
Although how this would work if HMRC found a client has mis-determined hundreds or thousands of contractors in one go I have no idea.

[Paralytic]

I can hear the groans already, but I called HMRC to clarify....

According to the call centre guy (I know, I know...) they can only go after the agency is the SDS is inside and they still process it gross, or if they deduct taxes but don't pay them to HMRC, or they were complicit in a fraud, or they "led the client to a decision".

He was adamant that, in this scenario whereby a client took reasonable care and the agency also accepted the reasons for the SDS in good faith, liability would pass back up the chain to the client. Of course, he couldn't provide any links to anything explicitly confirming that...

What you were told would actually make some sense if that how it was to be implemented, but, as others have said, that's not what the draft legislation says.

[jamesbrown]

Yep...

Not something I fully understand, but I'm pretty sure that transfer of liabilities in a contract does not trump legislation.
So where the liability is explicitly the clients' in law, I am not sure that it can just be transferred away But IANAL..... I expect this will be explored in detail, by those in the know, over the coming year.

Right, you cannot transfer a statutory responsibility. In other words, the debt absolutely would be paid by the supply chain in the first instance. The question is whether it could then be recovered as a matter of contract law and I think this part is sketchy (depends on the nature of the clauses and how they were entered into). Even if they were successful, the liability is limited, by design.

[eek]

Yep...

Not something I fully understand, but I'm pretty sure that transfer of liabilities in a contract does not trump legislation.
So where the liability is explicitly the clients' in law, I am not sure that it can just be transferred away But IANAL..... I expect this will be explored in detail, by those in the know, over the coming year.

Surely it doesn't matter as while the client may have to pay the bill, the purpose of the clause is to allow them to reclaim the money from you.

My concern would be that the client doesn't fight as hard as I would to avoid paying the bill...

[Lance]

Yeah, belt and braces.

TBH even with contract clauses, I think you'd be in a much less risky position post-April with an outside contract than before April, simply because the supply chain carries significant risk, regardless of any contract clauses. They will be looking to demonstrate the reality of the outside position under investigation (which is itself very unlikely, absent fraud). The debt can be transferred to any link in the chain above the PSC and a PSC can only pay what it has, even when the clauses succeed. However, one caveat: I would steer well clear of contractual clauses that attempt to transfer liability to the individual, i.e. you.

Yep...

Not something I fully understand, but I'm pretty sure that transfer of liabilities in a contract does not trump legislation.
So where the liability is explicitly the clients' in law, I am not sure that it can just be transferred away But IANAL..... I expect this will be explored in detail, by those in the know, over the coming year.

[jamesbrown]

Yeah, belt and braces.

TBH even with contract clauses, I think you'd be in a much less risky position post-April with an outside contract than before April, simply because the supply chain carries significant risk, regardless of any contract clauses. They will be looking to demonstrate the reality of the outside position under investigation (which is itself very unlikely, absent fraud). The debt can be transferred to any link in the chain above the PSC and a PSC can only pay what it has, even when the clauses succeed. However, one caveat: I would steer well clear of contractual clauses that attempt to transfer liability to the individual, i.e. you.

[ladymuck]

I would be looking for an insurance product against this, that's for sure.

[Lance]

I also wouldn’t overstate this risk. Afterall, HMRC can barely win an IR35 case on a good day. Now the entire supply chain is singing from the same sheet. There is really very little value in pursuing such cases, absent fraud. But, yes, the Fee Payer is ordinarily liable when an SDS has been compiled with reasonable care and is subsequently found wrong.

I can see a situation where insurers would cover this indemnity for a fairly small amount of money.
I have an indeminity on my house in case a small strip of land is ever claimed by the rightful owner. The insurance cost £130 and is perpetual whilst I live here. The land registry and council records go back 400 years. So the chance of a claim against my ownership is very small indeed.

On the basis that with the whole supply chain agreeing. And the contractor having some reasonably cheap insurance with enough cover. That this would become a new market.

[DrStrange]

Gosh, HMRC doesn't understand gov't legislation shock.

[jamesbrown]

I can hear the groans already, but I called HMRC to clarify....

According to the call centre guy (I know, I know...) they can only go after the agency is the SDS is inside and they still process it gross, or if they deduct taxes but don't pay them to HMRC, or they were complicit in a fraud, or they "led the client to a decision".

He was adamant that, in this scenario whereby a client took reasonable care and the agency also accepted the reasons for the SDS in good faith, liability would pass back up the chain to the client. Of course, he couldn't provide any links to anything explicitly confirming that...

I'll wait until I've got the indemnity wording to see if I'll sign up, but once more all I can say is what a bloody mess these rules are....

Gosh, HMRC doesn't understand gov't legislation shock.

[DrStrange]

Re the bit in bold. HMRC can do a check and decide that the SDS is wrong and put in a claim for unpaid taxes. This is where the liability then falls to the Fee Payer and is what the Fee Payer is trying to indemnify themselves against.

I can hear the groans already, but I called HMRC to clarify....

According to the call centre guy (I know, I know...) they can only go after the agency is the SDS is inside and they still process it gross, or if they deduct taxes but don't pay them to HMRC, or they were complicit in a fraud, or they "led the client to a decision".

He was adamant that, in this scenario whereby a client took reasonable care and the agency also accepted the reasons for the SDS in good faith, liability would pass back up the chain to the client. Of course, he couldn't provide any links to anything explicitly confirming that...

I'll wait until I've got the indemnity wording to see if I'll sign up, but once more all I can say is what a bloody mess these rules are....