If you’re new to contracting, or a veteran, you’re almost certain to have heard about IR35. Here we look at how tax investigation insurance protects you from the stress and potential costs of an HMRC enquiry.
In this guide, we cover the following:
- IR35 – the basics – how does the legislation work?
- How to protect yourself from a tax investigation
- Why bother with IR35 insurance? Is it still worth it?
- Isn’t an IR35 contract review all you need?
- Where can you buy IR35 insurance?
- Do you still need cover if you stop contracting?
- Do you need IR35 insurance if you work via an umbrella 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 left their permanent roles only to resurface as IT contractors – working in the same way they did previously (as ‘employees’). But now – enjoying the tax benefits of working via their own limited companies.
The rules seek to tax ‘disguised employees’ in the same way as employees.
New ‘off payroll’ rules went live in 2017 and 2021. The new rules place the burden of determining a worker’s IR35 status onto the end client, rather than the contractor’s own company. The only exception is if the client is a ‘small’ company in the private sector.
Clearly, it is in your best interests to protect yourself against the stress and costs of an IR35 investigation.
Although the number of contractors 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.
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 IR35 insurance. This covers the costs of professional representation in the event of an HMRC investigation.
Get an IR35 insurance quote from Qdos
Seb Maley, a director at leading tax specialists Qdos Status Services Ltd, answers our question about IR35 insurance.
Why bother with IR35 insurance? Is it worth it?
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 becomes more organised and determined it may well become far harder to prove that you are outside IR35.
IR35 insurance has two elements:
1. The legal costs of defending yourself
This means you will not have to deal with HMRC yourself and a vastly experienced consultant will be handling your case from start to finish.
2. The costs of unpaid tax, interest, and penalties
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 can also be 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.
Where can you get IR35 insurance from?
There are several specialist insurers in the contracting market which offer IR35 protection policies.
Some of the leading providers (aside from our partner, Qdos) include Kingsbridge, IR35 Shield and Markel.
You can also take out cover from a more general tax investigation insurer.
IR35 specialists often offer complementary services such as IR35 contract reviews, and employment status checking software.
Do you still need IR35 insurance if you stop contracting?
It is a prudent idea to maintain your tax investigation cover even if you stop contracting.
HMRC can still open an enquiry into your tax affairs going back a minimum of 4 years.
If you’ve made careless (or even fraudulent) errors in your tax returns, HMRC can even go back up to 20 years.
I work via an umbrella company. Do I need IR35 insurance?
If you are an umbrella company employee, then IR35 is not a concern, as you already pay taxes as an employee.
If you have worked via your own limited company in the recent past, however, it might be worthwhile keeping IR35 cover in place, for the reasons listed above.
Is there a contractual requirement to take out tax investigation cover?
No, this would be very unusual. This type of cover is optional. If you’re a contractor, you’ll often have a contractual obligation to have PI and business liability cover in place, but not IR35 insurance.
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.
1. Tax Enquiry Insurance (which includes IR35)
Costs £99/year.
This includes:
- 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.
As you can see, even if you’re not affected by IR35, your company will be covered in case it is selected for an investigation into any other area of tax.
2. 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.
Qdos is the leading provider of tax investigation insurance for contractors. We’ve partnered with Qdos since 2006!
