It is a simple question, but what is IR35 insurance? IR35 is a term that all contractors are familiar with. The level of understanding that each contractor has regarding IR35 varies from a little, to a lot, but what is common across the board is that contractors want to protect themselves against HMRC investigations.
The best way a contractor can protect themselves is to ensure their business takes out IR35 Insurance.
What is IR35 insurance?
There are various IR35 insurances out in the market, but by ensuring research is undertaken prior to making a purchase, a contractor can ensure that what they buy is contractor specific and fit for purpose. Contractor specific IR35 insurances will most often come in two forms. A standard version covers just the professional representation fees to defend against HMRC, whilst a comprehensive version extends cover to provide protection against the back tax and National Insurance Contribution (NIC) liabilities, and any interest and penalties applied by HMRC at the conclusion of their IR35 status enquiry.
Many providers purport to offer IR35 insurance but only provide the standard cover, which might not even be IR35 specific. Only a couple of brokers provide the comprehensive IR35 insurance.
The comprehensive cover is a belt and braces approach which provides complete peace of mind to contractors. In the event of a HMRC enquiry a contractor will not only be provided with highly experienced and top level professional representation to defend the HMRC enquiry, but, they will be safe in the knowledge that the financial tax amount at stake is also covered.
How much could I owe HMRC?
Tax liabilities deemed due by HMRC often run into tends of thousands. However, as recent high-profile cases have highlighted, liabilities approaching half a million pounds have been deemed due – life changing amounts. A good, solid, comprehensive IR35 insurance policy will offer cover up to £100,000 in respect of liabilities, with the contractor able to select an amount that is relevant to their own situation. Both the standard and comprehensive cover should provide at least a £50,000 limit for the professional representation – this being in addition to the liabilities cover.
IR35 contract reviews should also be provided with the comprehensive cover as a valuable additional service. This enables a contractor to get an opinion provided on a contract they have worked on from an IR35 perspective. It will be undertaken by a highly experienced professional who has reviewed hundreds if not thousands of contracts. It will result in a pass or fail opinion, and if deemed a pass, will form one part of the package of evidence in defence to HMRC.
When evidenced in tandem with an IR35 working practices review it provides in-depth evidence to support a contractors IR35 status. However, it should be noted that both reviews are not enough on their own, or together, to satisfy HMRC. The two documents will form part of a wider package of evidence in defence of the contractors IR35 status.
But I Won't Get Selected
HMRC have limited resources as we know, so the chances of a HMRC enquiry or investigation being opened are slim. HMRC don't have to suspect anything to open an enquiry, with many being opened as random spot checks. This means that all contractors are at risk no matter how outside of IR35 they believe their status to be.
The average time taken by HMRC to conclude an IR35 enquiry is roughly 18 months. This means that over that time the professional representation costs incurred are not insignificant, especially if goes on for longer. This can be a massively stressful time for a contractor as the pressure of the investigation hangs over them. It is also an unwanted distraction and hindrance in running a business.
So, with no guarantee of not being selected by HMRC, a timely and costly investigation, potential tax liabilities running into tens of thousands, ongoing stress and distractions from running a business, it makes insuring away the risk and obtaining peace of mind that should the worst happen is a prudent risk management strategy for any savvy contractor.