How does IR35 insurance for contractors work, in practice?
Partly because it gets recommended to contractors so much, by seemingly everyone from trade bodies to individual providers, IR35 insurance is one of those things that we’re often asked to demystify, in terms of how it works -- in practice, writes Seb Maley of Qdos.
More than meets the eye
We find that limited company contractors tend to understand the premise of IR35 insurance, which is that it’s an insurance policy protecting them in the event of an IR35 investigation by HMRC. But as you can imagine, there’s a bit more to it than just that, which I will cover here, exclusively for ContractorUK.
A form of tax liability insurance, IR35 insurance is designed specifically with the threat of the Intermediaries legislation and the off-payroll rules in mind. It offers peace of mind and financial protection in the event that HMRC decides to enquire into or investigate your IR35 compliance.
What's included in an IR35 insurance policy?
For contractors, next to consider is what an IR35 insurance policy tends to include. And only then you can look at how might the policy play out, should it need to be actioned.
I’ll start from the top, and unless using general terms, I will refer mainly to our own ‘coverage’ – an informal term for insurance – as we can’t really speak of what other providers do without delving into each and every one.
Let’s say you receive a letter from HMRC regarding your IR35 compliance. The first port of call if you hold IR35 insurance is to contact the provider, which with our policy, is when your so-called ‘defence costs’ kick in.
Once HMRC is in touch (cont.)
With us, the IR35 insurance includes up to £250,000 of professional representation. So put another way, contractors benefit from expert support, from day one, up to the tune of a quarter of a million pounds. An expert on IR35 will handle all correspondence with HMRC on your behalf, advising the contractor of the appropriate steps to take, while the expert looks to shut down the HMRC enquiry as quickly as possible.
However, should the IR35 enquiry not be resolved quickly, the policy will then provide professional representation throughout the various stages, up to and including the need to represent you at a tax tribunal.
But let’s go back to where we were. Following the conclusion of the enquiry stage by HMRC, and if HMRC wins the case – which of course is the worst-case scenario – the tax liability element of the IR35 insurance policy applies. For instance, if you’re issued a retrospective tax bill made up of missing income tax and national insurance contributions, and potentially even penalties and interest, the policy will cover this for you up to your chosen level of indemnity – whether that’s £50,000, £100,000 or even 250,000.
It's called 'coverage' for a reason...
This is the main aspect of what tends to be included in an IR35 insurance policy and explains why it’s rightly called ‘cover.’ It’s also worth bearing in mind that this key insurance also covers PAYE-related compliance reviews, VAT disputes and a broad range of HMRC enquiries.
Given that HMRC continues to enquire into the IR35 compliance of contractors, whereby it is scrutinising contracts completed prior to the introduction of the 2017 and 2021 off-payroll working rules, it’s hard to see how IR35 insurance isn’t anything but essential for independent workers who want support, financial and otherwise, if the worst should happen.
Find out more about IR35 insurance here.