If you’re new to contracting, or if you’re a veteran, you’re almost certain to have heard about the IR35 rules. Here we look at the potential costs of being caught by these rules, and how tax investigation insurance can protect you and your company.
IR35 – the basics
The Intermediaries Legislation, which was implemented in 2000, was put in place to counteract what HMRC describe as ‘disguised employment’.
Pre-IR35, IT workers would leave permanent roles only to resurface as IT contractors – working in the same way they did beforehand (as ‘employees’) whilst enjoying the tax benefits of working via their own limited companies.
Clearly, it is in your best interests to protect yourself in the event that you are selected for an IR35 investigation.
Although the number of contractors actually investigated remains fairly small, the financial cost of IR35 is significant.
How to protect yourself from the costs of an IR35 investigation
The first step is to ensure you have all your contracts reviewed by an employment status specialist.
The wording of your contracts should demonstrate that you are working in the manner of a truly ‘self-employed’ person, and your working practices (the way you carry out your contract work) should also mirror the terms of the contract.
Many contractors also opt to take out an IR35 insurance policy, which will cover the costs of professional representation in the event of an HMRC investigation.
Get an IR35 insurance quote from Qdos
We asked Seb Maley, a director at leading tax specialists Qdos Status Services Ltd, why you should bother with IR35 insurance if hardly any contractors get investigated:
Why bother with IR35 insurance?
“The first point to make is that HMRC has drastically increased their resources dedicated to policing IR35 in recent months, resulting in a significant rise in enquiries. Therefore the risk of being on the receiving end of an investigation is far higher than in previous years and this is likely to continue indefinitely.
“As thousands of contractors will testify, being faced with a full IR35 enquiry is an incredibly stressful affair. Enquiries can last for several years, creating a huge amount of uncertainty for those involved.
“Most contractors using expert representation have won their cases, but as HMRC become more organised and determined it may well become far harder to prove that you are outside IR35.
“IR35 insurance has two elements; a) the legal costs in defending you and b) the liabilities if you are ultimately found to be ‘inside’ IR35.
“a) means you will not have to deal with HMRC yourself and a vastly experienced consultant will be handling your case from start to finish.
“If you are found to be ‘inside’, HMRC will demand all unpaid tax and national insurance, plus interest and a possible penalty. The total sums generally run into the tens of thousands of pounds. This is also insured, meaning you are fully covered whatever the eventuality.”
Isn’t a contract review all you need?
“A contract review is certainly important, as it means you can make necessary improvements at the outset and shows that you have taken due diligence in ascertaining your IR35 position. However, it certainly doesn’t guarantee that you will be considered outside IR35 by HMRC.
“IR35 enquiries are very exhaustive; HMRC does not stop at the written contract but will go to great lengths to ascertain the ‘reality’ of the situation.
“This means obtaining statements from your end client about how they perceive your situation; something which obviously can’t be covered in a contract review.
“Having a contract review will start an enquiry off on the right foot, but HMRC will always look to delve far deeper.”
How much does it cost?
You can find out more about IR35 insurance, and the different types of policies available to you on the Qdos Contractor website (contract reviews + various insurance offerings).
Tax Enquiry Insurance (which includes IR35 matters) costs a mere £99/year.
- Up to £50,000 of defence costs.
- Covers a wide variety of potential HMRC investigations, e.g. PAYE compliance, PAYE/NIC disputes, VAT, HMRC aspect enquiries, Section 660 disputes.
- Expert representation throughout.
- Cover for retrospective tax years.
Qdos is the leading provider of tax investigation insurance for contractors. We’ve partnered with Qdos since 2006!
What is TLC35?
This is a comprehensive IR35 protection product – also offered by Qdos.
On top of the benefits offered by standard tax investigation cover (above), TLC35 also covers the cost of all interest and penalties you are found liable for as a result of an unsuccessful IR35 investigation by HMRC.
You can find out more about both products simply by clicking on the banner below.