IR35: The new challenges and how to handle them – part 4

In part 4 of this IR35 guide, we will cover:

• Insurance developments
• Warranty clauses in contracts
• Pushing back on warranty clauses
• Signing a contract that includes a warranty clause     

Insurance developments and warranty clauses in contracts

There is a development creating some concerns, in particular where contractors are being asked to sign contracts that have warranty clauses which state that the contractor will indemnify the agency (and/or end client) if the agency suffers a tax bill because of the engagement you were on.

If possible, you should think about negotiating to have that clause removed from your contract. Whilst it is unclear whether such a clause is enforceable, it would be unfair to accept liability for a tax debt which under the legislation was never yours. 

One solution appears to be agencies insisting that contractors purchase an insurance policy which protects the fee payer. The first question is, why should you do that? You don’t have an insurable interest because you have no liability.

Secondly, it seems that some agencies may view such a policy as a means for the contractor to indemnify the warranty and are requiring contractors to buy a policy. However, if the debt is passed on to you as a contractual liability, i.e. no longer a tax liability, then will such policies be obliged to pay?

A third concern about policies purchased by the contractor, is where you are in a contractual chain. With a medium or large sized entity and end client, they may receive a tax bill because HMRC confer fee payer liability upon the end client for not taking reasonable care. It’s unlikely that insurers will be happy to cover this. If we use a motor insurance analogy here: that’s like jumping into a car which you know to be unroadworthy, you are ‘under the influence’, and when that inevitable accident occurs, you expect the insurer to pay. That’s highly unlikely to happen.

Where HMRC accept that the end client has taken reasonable care, then the feepayer has the liability and we assume that the policy would pay out (assuming the fee payer is able to claim upon the contractor’s policy and the contractor has kept the insurance up to date).

One would have thought that it should be the fee payer buying the policy because they have the liability.

We can see the value of a policy where you are engaged by an overseas or small company and indeed, we provide a policy for that scenario and have been insuring contractors against tax loss since 2001. However, that relates to a completely different contractual chain and not the scenario being consider above. If you are engaged by a small (or wholly overseas) company, you always have the liability - no one else in the contractual chain does - so why would the end client or agency require you to buy a policy?

In summary, we don’t know whether that contractual obligation will be enforceable because we haven’t seen this happen yet. If it does, however, and a judge agrees you have signed it on behalf of a company and therefore accepts that it’s enforceable, it may not be the case that an insurance policy based around a tax liability is going to cover that. It is something to check with the insurer.

If there are any indemnity clauses in my contract, should I push back or ignore them as it’s unclear as to whether they are enforceable?

If you have an indemnity clause in your contract, you may wish to push back. If nothing else, it’s part of showing that you’re an independent contractor looking to negotiate terms although that in itself isn’t going to make you outside of IR35. The question about whether it’s enforceable or not has a number of elements to it.

First of all, would a judge see that to be a fair term? The answer is we don’t know because clearly with a contractor and a large agency, there isn’t the same level of economic power. A judge may potentially say it’s not enforceable because there’s no equality of the parties. Sitting behind that contractual liability is an NIC (National Insurance Contributions) liability and employers cannot be passed on to another party, so would a judge take this stance and deny the claim? We simply don’t know.

If I’ve signed a contract with one of these indemnity clauses in it, what can I do?

Ultimately, in this situation it may come down to asking yourself, do I want this work or don’t I? You may wish to push back if you can to get this clause removed but if are unable to do this, then you may feel obliged to take the risk to undertake the work.

Andy Chamberlain, Director of Policy at IPSE (The Association of Independent Professionals and the Self-Employed) says: “If you’re working in an industry where everyone is putting these contracts in and it means you can’t get any work unless you sign one of these contracts, this is something you could argue to a tribunal if it ever got there. Our advice is, if you can push back on it, do so. If they’re insistent on it, you’re going to have to make a tough choice on whether the work is worth the potential liability.”

To read part 5, click here.

Markel Direct offers a range of solutions for freelance contractors including Legal Expenses Insurance and an IR35 Contract Review service.

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