Dear Contractor Doctor,
My agency has asked me to sign an amendment to my contract in relation to ‘new legislation’ set out in the Finance Act 2014, sections 16-20, to do with the False Self-Employment legislation.
The amendment includes a clause stating: ‘Supplier (my Ltd Co) will indemnify the agency if the agency and affiliates or such affiliates’ directors suffer loss due to suppliers’ breach of the new legislation or breach of clause 2.2 (a)-(e) above.’
I am wary about agreeing to a new clause in my contract like this as I am concerned that I am being asked to provide an unlimited indemnity.
Can my agency force me to add indemnity clauses like this into my contract?
Contractor Doctor says:
According to Roger Sinclair of contractor specialist law firm Egos, the agency is attempting to change the terms of an already active contract. This means that any request for change, including a request to incorporate a new indemnity provision, would be considered as a ‘contract variation’.
If you’re a contractor who has been asked to provide an indemnity, you need to consider:
- What you’re being asked to indemnify
- Whether you’re obliged to agree to vary a contract at all
“The whole point of a contract – particularly one in writing – is, in effect, to ‘cast in stone’ what the parties have agreed, and can therefore not go back on,” Sinclair explains. “There is no general legal requirement to agree to any variation on a contract once it has been agreed.”
What is a contract variation?
“Just as the contractor cannot expect to be able to demand the agency doubles their rate, for example, the agency does not have the right to insist upon inclusion of additional terms – such as the inclusion of an additional indemnity,” Sinclair continues. “Either may ask, but the other party is free to say yes or no as it pleases.”
However, if you decline to agree to a contract variation, you must be aware that there may be further consequences, as Sinclair highlights:
“The agency can’t force the contractor to agree to an amendment. However, in many cases the agency will hold the right to lawfully terminate the contract early, and so contractors need to consider that risk if they decline a variation.”
Even if you agree to a request for a variation, strictly speaking, it may require more than simply inserting a clause. Sinclair points out that any agreement to vary a contract needs to have all the necessary characteristics of a contract in itself.
What is ‘consideration’ for the variation?
One notable element that it must contain in order to be legally valid is ‘consideration’ for the variation. Consideration is a core element of any contract, and it may be considered as meaning that each party must get something out of the agreement to vary the contract.
Consideration could take one of several forms. These include:
- A mutual abandonment of existing rights
- New benefits being granted by each party to the other
- Each party assuming additional obligations in the instance that the contract is breached
“The point is that both parties must be seen to ‘give’ or ‘give up’ something,” adds Sinclair. “Now, the contractor may ‘give’ something by agreeing to insert a new clause, but what has the agency ‘given’ or ‘given up’ in this instance? – On the face of it, nothing.”
Sinclair adds that the absence of consideration generally indicates that the agreement to vary doesn’t incorporate all the essential elements of a contract. As a result, it may not be enforceable as such.
What is my agency asking me to indemnify?
“The legislation in question (Finance Act 2014, sections 16-20) is what is called the ‘False Self-Employment’ legislation,” Sinclair continues. “This is designed to stop workers being engaged and paid by intermediaries such as agencies on a self-employed ‘gross’ basis, when it is deemed that they should really be paying taxes and National Insurance Contributions (NICs) as if they were employed.”
For this contractor, it seems the reason the agency wants an indemnity is a misplaced concern that the agency or its directors might become liable if HMRC were to decide the contractor should have been paying income tax and NICs via PAYE.
Should my agency be asking me for an indemnity?
For Sinclair, the most puzzling aspect of this scenario is the apparent inability of the agency to accurately identify what it is that the contractor is being asked to indemnify them against.
“The contractor has every right to be concerned that he is being asked to give an unlimited indemnity, due to the vague nature of the proposed amendment. It appears as if the agency thinks it is trying to save its own skin, without actually having any real understanding of the issues.
“The request is nonsensical, as it refers to the supplier’s – i.e. the limited company’s - breach of the legislation. However, if you read the legislation, you’ll see that it doesn’t actually impose any obligation upon the supplier. Therefore, there is nothing that the supplier might be in breach of,” notes Sinclair.
“The whole of the False Self-Employment legislation imposes obligations on the agency, so why should you indemnify the agency against your own breach of non-existent obligations?”
Can I provide assurance without assuming liability?
Ultimately, all the agency wants is reassurance that it is not exposed to liability. To achieve this, it needs confirmation from the contractor’s company that all remuneration it pays the contractor for work done on the contract is paid and taxed as employment income, rather than self-employed gross income.
Instead of providing an indemnity, Sinclair points out that you should be able to provide this reassurance without taking on any of the risk yourself, even if the majority of your income is via dividends.
This is because HMRC generally accepts that dividends are not remuneration, but rather they are reward for investment in the company. This is a subtle, but important difference.
How can I provide assurance?
As Sinclair explains, the new s44(6) ITEPA (introduced by sections 16-20 Finance Act 2014) sets out the definition of a ‘relevant person’. This is somebody other than the agency or individual contractor, who is party to a contract with the agency under which services are provided for which the agency makes payments.
The contractor’s own limited company fits the definition of a ‘relevant person’, meaning that written assurance from the limited company should be enough to satisfy all parties involved.
Written assurance from the ‘relevant person’ to the agency confirming that your remuneration is being paid in the form of employment income, and is therefore subject to PAYE, will generally prove sufficient in removing any liability from the agency without placing yourself at risk.
Can I provide assurance if I don’t pay PAYE on my income?
Your limited company can still provide this assurance even if you don’t actually have PAYE deducted from your income. Take a contractor operating a high dividend/low salary split, for example:
- Dividends aren’t considered remuneration
- Only salary is within the scope of the legislation
Although most contractors will typically pay a salary below the NICs threshold as not to attract tax, Sinclair points out that the salary is regarded as being subject to PAYE, even though no tax is payable.
“In these circumstances, such an assurance should be enough to satisfy the agency’s concerns. In the real world, that is how I would advise a contractor client to respond to a request such as this,” he concludes.
Don’t be forced into accepting unjust contract variations
If you’re a contractor who has been asked to agree to an additional clause within an existing contract, you have every right to be cautious. Find out why the agency is attempting to insert a new clause and fully consider the ramifications on you and your company.
Although there may be consequences if you don’t oblige with the agency, there may also be alternative courses of action that appease both parties. Explore all possible options and seek legal advice, if necessary.