Life is about to get that bit riskier for contractors and freelancers operating through their own limited company in the private sector thanks to the upcoming IR35 reforms, set to come into effect in April 2020.

Unfortunately, the impact of the off-payroll changes that hit the public sector in 2017 has already been felt – a worrying sign of things to come for contractors in the private sector. In far too many instances, genuine contractors have found themselves classified in law as employees for tax purposes only, forcing them into the PAYE system and slashing their take-home pay. On top of this, many more face the worry of retrospective tax bills and late payment fines if HMRC deems them to have incorrectly declared their employment status, as highlighted in high-profile cases such as that of TV presenters Lorraine Kelly and Kaye Adams. Yet despite widespread criticism and calls for the government to halt the rollout to the private sector, change seems inevitable.

It’s time to prepare and protect your business from IR35

So what do contractors need to do to protect themselves? First up, the most important thing is to work with hirers and draw up accurate and comprehensive contract terms that cover fees, expectations and work delivery. The contract must reflect the true working arrangement and clearly demonstrate that this is a contractor/client relationship, not one of an employee/employer. However, even the most prepared and diligent contractors are at risk of a tax investigation.

Indeed, HMRC regularly carries out random checks and when they deem a contractor to be in breach of the rules, they will claim tax liabilities. These liabilities often run into tens if not hundreds of thousands of pounds – amounts that could easily destroy a business - and that’s without considering the professional representation costs involved. It’s why many are choosing to take out comprehensive IR35 insurance, which removes the element of risk and gives them peace of mind should the worst happen.

Contractor-specific IR35 insurances usually come in two forms. Here’s what you need to know.

IR35 Tax Investigation Insurance

This is a standard, entry-level version of insurance that provides the basic cover you need to pay for the professional representation fees in your defence against HMRC.

From the moment HMRC opens an IR35 Status Enquiry into your company, this insurance package covers the cost of the expert representation you will need to defend yourself. A tax investigation usually lasts for an average of 18 months. In that time, you want to be able to focus on running your business, not taking the time to personally defend yourself, spending hours reviewing, preparing and submitting evidence. The risk is too high and, without insurance, legal fees could set you back tens of thousands of pounds.  

This insurance starts at £65 and is underwritten by one of the leading insurers in the UK, covering the legal costs involved in a case, including solicitors and barristers’ fees, court costs, experts’ fees and attendance expenses. See more details here.

IR35 Tax Investigation & Liabilities Insurance

This insurance package not only covers the cost of your legal fees but also extends to protect your business against all back income tax and National Insurance Contribution (NIC) liabilities. Additionally, it covers any interest and penalties applied by HMRC if you are found to have breached IR35 rules at the conclusion of the enquiry.

This type of insurance is designed to give you complete peace of mind. As with the first package, you’re completely covered for the expert legal representation you’ll need for the entire duration of the enquiry, but it will also provide full protection for all taxes and NIC contributions you may owe, as well as penalties accumulated over the six years that HMRC can investigate.

IR35 Tax Investigation & Liabilities Insurance starts at £190 and will cover your business up to £100,000 in legal fees and £25,000 in liabilities. See more details here.

IR35 Contract Review

Every time you take out an insurance policy, Larsen Howie carries out a comprehensive contract assessment. Simply submit your contract for review, and the team will assess your IR35 status and advise you on the best way to proceed.

Each insurance policy lasts a year, but you can also send other contracts for review during that time. For more detailed reviews, you can take advantage of an IR35 Contract Review – Full, which provides personal feedback on relevant clauses, guidance on switching to contracting, and advice on legislation for extended contracts – all of which can be turned around within five business days as standard, or next-day if required.

If you’re concerned about IR35 or want to find out more about our insurance packages, please get in touch with our team of experts, including our resident tax and IR35 expert Andy Vessey ATT, who will guide you through your options. You can also find out more by reading the latest industry insight in our Knowledge Hub.

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