Contractors’ Questions: Do I need Professional Indemnity Insurance after I close my company?
Contractor’s Question: Should I have Professional Indemnity Insurance after I close my limited company to guard against the risk of a retrospective IR35 investigation, relating to contracts which the company had in the past?
Expert’s Answer: As you may or may not know already, Professional Indemnity Insurance (PII) isn’t actually a legal requirement for absolutely every contractor. But most clients will require contractors to have such protection in place before starting your contract.
Depending on your trade, you may be legally required by your trade association or regulatory body to have professional indemnity insurance, notably for surveyors, architects, medical professionals and indeed IT contractors. Professional Indemnity Insurance can protect you from claims against different types of professional negligence, such as:
- Breach of confidence: Circulating sensitive or confidential information without consent, for example.
- Breach of copyright: Breaching trademarks, copyrights, or intellectual property.
- Negligence – Delivering bad advice or making a mistake which may result in a financial loss for the client, for example.
- Defamation – Making false or damaging claims about the individual or organisation.
If you are left paying for a mistake you have committed, PII can cover you for any eventualities which fall into this bracket. Should your client take legal action against you, your PII will typically cover any costs or compensation incurred. You must take out the appropriate level of cover to ensure that the nature of the work in question is protected and the full extent of any legal costs and compensation is covered.
Taking out PII retrospectively
In your situation, you might be pleased to know that Professional Liability Insurance can be taken out at a later date if you believe that you will need it to cover a project completed in the past. This is known as ‘retroactive cover’. This type of cover protects backdated projects. However, you should ensure that your history complies with that set out by the policy for the insurance to be valid.
There’s also ‘run-off’ cover. This type of cover is for contractors who have ceased trading, taking a break from contracting or entering retirement. For a claim to be covered by your insurance policy, you should have an active policy in place when the claim is made and not necessarily when the negligence took place. As a result, run-off cover was established to protect those who have closed their limited company or signed off from trading altogether.
When taking out your policy, it’s vital to clarify the above as the finer details of each policy will vary and depend on the insurance provider. As with other insurance products, there will typically be a cooling-off period of 14 days in which you can cancel without incurring a fee, providing that you have made no claims.
IR35 investigation after a business closure
Let’s bust a myth – and that myth is this: ‘HMRC can investigate your business post-closure and insurance cannot, therefore, be used as a tool to dodge the taxman as company closure does not result in immunity from tax investigations.’
Actually, if HMRC suspects your business to have arrived at a false tax position or incorrect IR35 status, HMRC can reject your company strike-off request. The Revenue has the flexibility to investigate this at any given time within two years following the closure of your business. As a result, your insurance policy should mirror this and offer cover lasting two years after closing your company.
In addition, HMRC has the power to probe contractors under IR35 retrospectively over 20 years, even after the closure of your business. Shining the spotlight on the maximum limit, this can initially begin at four years as a result of unintentional, honest errors and jump to six years for carelessness. If HMRC suspects fraudulent activity to have taken place, they can extend the time frame in question to the maximum of 20 years to investigate suspected tax avoidance.
Check the small print for IR35 coverage
The likes of PII can aid you in an IR35 investigation as this is a reflection of you taking the initiative to shoulder the responsibility to protect your business from any mistakes. If you trigger an IR35 investigation, it’s vital to have the likes of appropriate insurance in place, such as tax investigation cover, also known as IR35 insurance. Check that your policy consists of the relevant coverage in the event of an IR35 investigation; otherwise, you’ll be left drawing the short straw.
The expert was Keith Tully, partner at Real Business Rescue, a company liquidation and business recovery specialist for contractors, small businesses and self-employed professionals.