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Contracts Stipulate 100% Liability for IR35

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by Contractor Weekly

Public sector contractors find clauses passing the liability back to them

The recent changes to IR35 and employment status have resulted in the insertion of some new and sometimes odd contractual clauses.

One of the latest changes which seems to be adopted by many agencies is a clause which states that a Personal Service Company (PSC) contractor must be liable for any tax and NICs owing due to a status challenge under IR35.  For contractors working in the private sector, clauses like this seem rather nonsensical because this has always been the case, but where does that leave us following the IR35 changes in the public sector?

It’s a slightly trickier situation for contractors operating in the public sector. IR35 Reform in the public sector now means that not only are end clients responsible for determining the tax status of its contractors, but the fee-payer will also be liable for the unpaid tax following a status challenge by HMRC.  The recent clause added to many contracts by agencies seeks to attempt to pass such liability back to the contractor.

Following a HMRC enquiry, contractors could find themselves, under the terms of their contract with the agency, having to pay the end client’s liability as a result of an enquiry into their IR35 status. If they failed to pay the liability, they could find themselves in breach of contract, potentially resulting in a legal dispute.

Whether such clauses would stand up from a legal perspective is unclear at this point, as this would seem to fly in the face of what the legislation was intended to achieve.  As the legislation has only recently been introduced, no legal precedence has been set and the full ramifications are yet to unfold.

Clauses like this will usually be highlighted in an IR35 review, but they also present a legal issue and any contractors concerned should seek advice from a solicitor to discuss the full implications. However, it is difficult to see how a contractor can be held responsible for a decision that has been taken completely out of their hands.