Contractors should be aware that companies are suing their IT contractors more often due to the new IR35 changes. Having good PI coverage is more critical than it ever has been, and contractors should resist HMRC’s inclination to keep claims from becoming public knowledge.
Due to changes in IR35, contractors may face an increased risk of clients suing them when they feel that the contractor may not have met contractual obligations. In the past, client companies rarely looked to recover costs from IT consultants or subcontractors if projects ran into snags or difficulties. Now that the rules have changed so much, it is increasingly evident that clients may be able to sue for damages in the face of contractual problems.
Reasons for Bringing Suit
Companies typically sue contractors because they feel that the contractors have not met expectations or because the contractor has exceeded time restrictions. Clients usually claim for interruption of business and for the loss of profits. IT contractors might have clauses in their contracts which exclude liability for these types of claims, but lawyers warn that contracts must be drafted correctly to protect the contractor truly. Many of these clauses do not hold up in court when challenged. When the terms are not written correctly, the contractor almost always has to pay a percentage of their fees.
Experts state that the vast majority of these suits will be settled out of court and that contractors should consider getting themselves PI to protect themselves from having to pay out of court when they were not genuinely working inside of IR35.
Better Personal Indemnity Insurance is Needed
To offset growing risks to their contracts, contractors should consider offsetting this risk with a high-level Professional Indemnity (PI) policy. This insurance will not prevent people from suing, but it will help protect the contractor from paying more damages than they should in the case of a suit.
According to umbrella company owners, most contractors need about £2 million in coverage. Proper personal indemnity insurance is of primary importance for contractors now. Recruitment agencies and clients might soon require that these policies be in place before they hire for a job. The only reason that more people are not aware of these suits is that they are being kept quiet on purpose. Contractors should be mindful that they are at risk for this type of thing and take care to protect themselves.
