The IR35 legislation is a term that’s on a lot of contractors’ minds at the moment and it’s becoming more talked about in the media. But what exactly is it? This legislation is the UK’s anti-avoidance tax legislation that was rolled out in 2000 in order to stop contractors from avoiding tax payments by hiding their true employment status.
You might’ve heard of the dangers of being found ‘inside IR35′ or failing the ‘IR35 test‘. To be found ‘inside’ the legislation means that you’re a disguised employee and your relationship with your end-client is similar to that of a permanent employee. If HMRC determines that you’re breaking the IR35 rules through an IR35 investigation, you may find that you have some hefty fines to pay and you’ll have to reconsider the way that you pay your tax. You can find out the difference in take-home pay when you’re operating ‘inside IR35’ than when you’re operating ‘outside IR35’ with the IR35 calculator.
Why do you need IR35 insurance?
Insurance is one way to protect yourself from the financial implications of IR35. What are the risks associated with IR35 for contractors?
The complexity of the legislation
First of all, if you’ve been reading up on IR35, you will probably have realised that it isn’t very straight forward. The legislation has many clauses and even the employment tool that HMRC created to check your IR35 status (the CEST tool) has been criticized. Therefore, you may think that you’re complying with the regulation but, there may be certain areas of the contract that imply that you’re inside IR35. In April 2020, it will be down to your end client to determine your tax status and if they’re confused by the legislation, they might give you the wrong status. Although you can appeal, they can also insist on their decision and you may find yourself at the centre of a lengthy HMRC enquiry. In these instances, IR35 insurance can cover you for your legal expenses and for any extra tax payments that you may be told to pay.
HMRC’s increased policing
HMRC has significantly increased its regulation of the IR35 legislation in recent years. One indication of this was the 2017 public sector IR35 reform and the upcoming 2020 private sector IR35 changes. In both of those cases, it has been announced that it will no longer be down to the contractor to determine their own tax and IR35 status. In order to crack down on ‘disguised employees’, HMRC is placing the tax liability with the end client and it will be those who are penalised if the decision is incorrect.
The Revenue has also dedicated extra resources to policing the legislation. Both of these factors mean that you are now at a higher risk of being investigated and this risk is only set to grow further. Another level of uncertainty around the policing of IR35 is the selection process that HMRC use to choose who they will investigate. These criteria are unlikely to ever be released and therefore all contractors and companies who use contractors should maintain their awareness of the legislation. IR35 insurance can provide you with extra reassurance and financial protection around this uncertainty.
The length of an IR35 investigation
Unfortunately for those involved, an IR35 investigation can last several years. This is as HMRC delve deep into your working situation by gathering statements from your end clients and examining your contracts. There is also the potential for the case to be taken to a tribunal where you will be under further examination. Understandably, this can put a strain on your ability to work and affect stress levels. With defence IR35 insurance, you will be presented with an expert representative who will fight your case in court. Among contractors who have used representation from their insurers, the majority have won their case. However, as HMRC continue to highly prioritise IR35, tribunals and cases may become harder to fight and the need for representation who are clued up on the subject is increasingly important.
A contract review isn’t enough
It’s important to review your contract in the event of an IR35 investigation. This shows that you’re taking the time to further understand and comply with the legislation. Unfortunately, HMRC delves deeper into your employment situation and a contract review won’t answer all their queries. In fact, your end client will most likely be asked to provide statements on your working relationship so that HMRC can build a bigger picture of your situation. Again, IR35 insurance can cover your legal costs and any penalties you may face as a result of an enquiry.
You could be charged for previous years
HMRC does not only investigate current cases. Based on previous cases, HMRC can conduct investigations that look at any contracts you’ve signed over the past six years. As you can imagine, if you have been found to be non-compliant for multiple contracts over an extended period of time, the amount owed could be significant. You can agree with your insurer the number of years that you want to be covered for and this can protect you against surprise costs and penalties.
What does the IR35 insurance cover?
When it comes to IR35 insurance, there are many different types of cover to suit your needs as a contractor. There are two main types of IR35 insurance though, these are defense only and comprehensive.
Defence-only cover
Defence-only cover will provide you with representation to cover you in a tribunal as we discussed earlier. These individuals are experts on IR35 and can fight your case as best as possible. If you chose this type of cover, you will be provided with a consultant who will handle your case from the end to the beginning. As soon as you receive a letter from HMRC notifying you of a contract review or investigation, you can pass this on to your consultant who will deal with it for you. This means that you will not have to deal directly with HMRC at any time, which could understandably be stressful.
Comprehensive cover
The other main type of insurance is comprehensive cover. With this cover, you will not only receive the defense cover as described above, but you will also get financial cover. If you are found to be within IR35, and a ‘disguised employee’, HMRC will most likely demand that you pay your unpaid tax and National Insurance, including interest. Not only this, but you may also be asked to pay a penalty for claiming the wrong IR35 status. All in all, this could set you back tens of thousands of pounds which could be detrimental to the running of your business. However, with the comprehensive cover, you will be covered for any of these unexpected costs. In the case of many contractors, who operate on a small scale, this could be the difference of saving or collapsing their companies.
When should you take out IR35 insurance?
Anyone who operates as a contractor or freelance worker should consider taking out IR35 insurance as soon as possible. As we’ve discussed above, the financial risks of being caught within IR35 are too great to ignore and this type of insurance can provide the essential cover. For this reason, we would recommend that you take out IR35 insurance as soon as you become a contractor or before you sign a contract with an end-client. In fact, some clients insist that their contractor has legal insurance before they allow them to sign the contract so IR35 insurance may be an essential before you complete certain jobs.
As we can see, taking out IR35 insurance is pretty much an essential for all contractors. Due to the complexity of the legislation, you don’t want to be caught out and end up having to owe a significant amount of money. In addition to this, having to deal with HMRC and legal aspects of an investigation can get in the way of doing your actual job and can put a lot of stress onto an individual. This is also where IR35 insurance can help. As we’ve discussed, there are a range of covers to choose from and you should find one that matches your own situation for the best type of protection. You can use the form on this page to find and compare IR35 insurance costs and find a cover policy that matches your needs.
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