What is the difference between tax enquiry insurance and IR35 insurance?

It won’t come as a surprise to contractors that HMRC is ramping up its compliance activity, as the Treasury looks to raise revenue to improve the economic outlook, writes Sam Cox, a director at status advisory Qdos.

Shift in IR35 liability doesn't take limited company workers out of HMRC's crosshairs

And while the introduction of the off-payroll working rules (in the public sector since April 6th 2017 and private sector since April 6th 2021), may have shifted the IR35 liability to fee-paying parties, the threat of IR35 investigations for contractors remains.

Remember, HMRC retains the right to scrutinise contracts that were completed prior to the roll out of the off-payroll working rules. The contractor will also be the target if the client they are working for is a ‘small company’ -- and we have seen a significant increase in the number of consultancies engaging contractors who would fit this criteria. This means that insurance remains a must in a contractor’s toolbox.

Explained: The difference between HMRC enquiry insurance and IR35 insurance

But there are a number of contractor insurances available designed to protect you in the event that HMRC decides to investigate your affairs.

Two forms of IR35 insurance are typically available: Tax Enquiry Insurance and Tax Liability Cover.

Our advisory and IR35 contract review firm often hears the same question from contractors -- What’s the difference between Tax Enquiry Insurance and Tax Liability Cover?

Are they one and the same, or are they two separate policies?

In short, they’re different. However, there are some shared elements of each of these two vitally important contractor insurance policies, which we outline below.

What is tax enquiry insurance?

Tax enquiry insurance is an IR35 insurance policy which provides protection for freelancers, contractors, sole traders and small business owners. This policy covers the costs – up to a specified limit – of expert representation in the event of any HMRC enquiry.

While IR35 enquiries will likely be the most pressing concern for many contractors and freelancers, and a tax enquiry insurance policy is primarily an IR35 insurance, it will usually also cover wider HMRC enquiries, including a routine compliance review, a VAT dispute, or a look at your limited company’s corporation tax, any of which can be drawn out, expensive and stressful.

With tax enquiry insurance, you can focus on what you do best while a trusted expert handles correspondence with HMRC on your behalf and protects your best interests.

It is, however, important to note that any resulting tax liabilities are not covered by such a policy.

What is tax liabilty cover?

Tax liability cover is a more comprehensive form of IR35 insurance to further protect contractors against the persisting threat of this notoriously complex and controversial legislation.

Offering all the protections of a tax enquiry insurance policy, tax liability cover is a form of IR35 insurance that also covers resulting IR35 liabilities – up to the specified limit – for income tax and National Insurance Contributions, as well as interest owed and any penalties that may be issued for non-compliance.

Tax liability cover is subject to risk assessment, but eligible contractors will be covered in the event of IR35 enquiries with representation costs of up to £50,000 and, depending on the level of indemnity you choose, tax liabilities up to £250,000.

As a more robust form of IR35 insurance, tax liability cover brings everything together. Contractors are insured in the event of an IR35 enquiry and are also financially protected in the event that they are issued a tax bill resulting from non-compliance.

There’s both HMRC cover, and HMRC cover that goes several steps further…

So, to recap, these two IR35 insurances are different, but with some shared elements. Tax enquiry Insurance will protect you from the cost of defending a tax enquiry. Tax liability cover does the same, but goes several steps further, ensuring that any tax liability is covered in respect of IR35 enquiries.

Up against an aggressive HMRC, which sees IR35 as a priority, making sure that you pick the right insurance policy – and the right level of cover – is an important decision that contractors need to get right.

Thursday 25th May 2023
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Written by Sam Cox

Sam is commercial director at Qdos and has a wealth of experience in the contracting and recruitment sector, having developed award-winning insurance policies for independent workers and the businesses engaging them.

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