Contractors' Questions: Do I need PII, as the IR35 test asks?
Contractor’s Question: On the IR35 business entity test questions from HMRC, number 2 – the “PII test,” asks whether or not I need professional indemnity insurance. As a personal service company, how am I meant to deduce, or work out in advance of an incoming contract, if, in fact, I do 'need' PII?
Expert’s Answer: Professional indemnity insurance protects you and your business against claims made against you by a client who alleges that you have made a mistake or been negligent in the advice or services you have provided.
The client’s allegation may be true, partially true, or unfounded – should a claim be made in any of those circumstances, you may want the benefit of insurance to help defend yourself or to put things right.
This type of insurance is not a legal requirement, but is often required by a company before they will hire a contractor.
HMRC’s PII test - explained
Under fresh guidance from HMRC, the “need” for PI counts as one of the twelve “tests” to demonstrate that a contractor meets the requirements of [a business entity for] IR35 [purposes]. Proving that you have a policy (by means of a policy document and premium note) is part of this, HMRC says, but an explanation of why cover is needed is also required. A copy of a contractual requirement stating that PI is required may do this.
The risk of a claim being made does not end with the contract; it may be that a problem with the work you have done does not arise until some months later. You may wish to consider holding a PI policy on an ongoing basis to provide cover for all work you perform, for all your clients, including after the contract has finished.
‘I don’t need PII’
Some contractors choose not to buy PI cover because they believe they won’t make a mistake, or that it won’t happen to them; unfortunately, a claim can be made even if you have done nothing wrong. Without cover, it would be your responsibility to find the time and money to defend yourself, and your reputation may be at risk.
Ask a broker
Some policies provide additional benefits over and above cover for negligence or mistakes; these are worth exploring. A broker will be able to highlight the covers available, and your accountant will be able to explain if and how PI will help you meet HMRC’s IR35 tests.
The expert was Sam Newman, head of professional indemnity insurance at Hiscox, a specialist insurer for contractors, which has also created a video guide to PI insurance.