We hate to repeat our IR35 indemnities stance in terms of contractor enforceability, but…

It’s been brought to our attention that “it's not right to indicate that indemnity clauses against IR35 taxes are not enforceable.”

This was one response we received to this article we penned for ContractorUK on off-payroll indemnity clauses designed to make contractors a liable party, writes David Harmer, a director at Markel Tax.

The linked-to article is related to Chapter 10 ITEPA, and hopefully makes clear enough we were referring to indemnity clauses imposed on contractors specifically regarding Tax and National Insurance arising from Chapter 10.

IR35 indemnities? They’re not new

Indemnity clauses in respect of ‘old’ IR35 were fairly commonplace. This was due to the fact that under the Chapter 8 rules, the contractor determined their own IR35 position, and agencies/clients would quite reasonably want some kind of reassurance that they have a contractual right to challenge any potential HMRC liability that may be brought against them under IR35, as this would be due to the direct result of a contractor determining their position as outside IR35. In other words, the agency did not want to be left on the hook for tax and NI liabilities due to the sole actions of the contractor.

With the introduction of the Chapter 10 Off-Payroll Working (OPW) rules, as explained by my colleague Nikola Nowak in the linked-to ContractorUK article, the responsibility for determining whether IR35 applies shifted to rest with the engaging client.

The responsibility for administering the correct tax treatment rests with the fee-payer. 

Out of the loop

So the contractor (bar any disagreement process) is effectively cut out of the loop, in respect of the initial determination as to whether IR35 applies.

As our business commented in the December 2023 article, we believe that an indemnity seeking recovery of tax and NI liability under Chapter 10 from a contractor, who has no decision-making duty to dispose of, would in our opinion be a questionable contractual provision to enforce.

What enforcing an OPW/ IR35 indemnity clause would likely look like…

The reality of enforcing this clause would be as follows (and I will refrain from using legal terms for the sake of clarity):

• In order for such a clause to be enforced on a contractor, the fee-payer would have to suffer a loss.
• In order for that loss to be suffered, the fee-payer would have been subject to HMRC enquiry and assessment, and the enquiry and/or subsequent appeals would have to be concluded.
• The fee-payer would need to physically pay the monies across to HMRC.

After this third stage, the fee-payer would effectively be seeking to recover from a contractor, under contract law, the tax and NI duty that HMRC has placed on the fee-payer. So it would be recovering from a party who had no legislative obligations and has not had any authority to affect any of the events which caused the liability to crystalise.

Untested = opinion (for now)

We are not aware that this has been tested in the courts. So this is an entirely opinion-based matter. 

And our opinion is that, when you break it down to its simplest form, it would be an action under contract law to impose a contractual provision on one party to pay the tax and NI obligations of another party (which has been imposed under tax law). It is our opinion, following the general principles that a party cannot contract out of legal obligations, that such a provision is not readily enforceable. That is not to say that because we don’t deem it readily enforceable that such a provision simply doesn’t matter or ought to be hastily accepted without due consideration by a contractor presented with it!

Our opinion, as we stated in the hyperlinked article by my Markel Tax colleague, assumes that no parties in the chain are acting fraudulently or lying about the operation. It is simply our reasoned belief, that on the face of it, if all parties are operating correctly and complying with their legislative obligations, we do not consider that a contractual provision which seeks to recover statutorily enforced liabilities on the fee-payer could readily be enforced against a contractor who does not have those statutory liabilities or obligations.

It would be tempting to conclude with ‘I rest my case’ but it’s likely that opinions about the enforceability of IR35/OPW indemnity clauses against contractors will continue to abound until a court puts the issue beyond doubt.