Being ‘caught by IR35’ is a fear that many contractors face as a HMRC investigation into your IR35 compliance can be an extremely stressful and costly enterprise. Even the most diligent contractor can fall foul of the labyrinthine regulations and requirements, so it’s advisable to take out IR35 insurance to protect your business.
Is tax liability insurance a necessity?
Many contractors are beginning to see tax liability insurance as a necessity. IR35 legislation is designed to weed out limited company-running contractors who are in fact employees in all but name, working a single job for a single client but enjoying all the tax benefits afforded to limited companies. According to HMRC, this type of worker should be taxed similarly to employed workers and, if you are judged to be within IR35 and haven’t declared it, you could be liable for thousands in back taxes, plus interest.
Frequently Asked Questions
Why should a contractor want IR35 insurance?
You may think that your tax status is fairly obvious. However, there are a number of ‘traps’ that HMRC uses to catch contractors that can cause those who believe that they are legitimately working outside IR35 legislation to fall foul. The process often starts with a PAYE audit and if HMRC becomes suspicious of any wrongdoing, they can escalate the enquiry to an IR35 specialist.
There can be a lot of anxiety associated with this stage as HMRC have never revealed their criteria for escalating an IR35 enquiry, so although the odds are against your business being targeted, the element of the unknown is enough to convince a lot of contractors that they should take precautions for their business.
Once your business is under investigation for IR35 non-compliance, the costs can quickly mount: not only do you have to pay legal fees, you could also be liable for back taxes if you are found to have evaded IR35 regulations. This is true too of a PAYE compliance review, a VAT dispute or any other HMRC enquiry.
What services does IR35 insurance cover?
You can elect to purchase insurance that covers your legal representation (an expense which can be upwards of £130/hr) or you can go for more comprehensive coverage to cover your losses should your defence prove unsuccessful. If HMRC determines that you fall under IR35, and therefore owe back taxes and penalties, the bill can be crippling for a small business. Comprehensive coverage gives you the peace of mind, that should the worst happen, you’ll be able to meet the costs.
Some insurers also offer a IR35 compliance service that provides qualified financial experts to analyse every aspect of each assignment contract so that the wording doesn’t give any ammunition for HMRC to suggest that you’re actually an employee.
What kind of things might put me in danger of being investigated?
The HMRC are on the look-out for contractors that have all the security associated with a traditional employee but are also benefiting from things like tax breaks on their expenses and VAT.
If you want additional clarification on your IR35 position, the HMRC website provides a quiz that helps you work out if the assignment you’re doing falls within IR35 legislation. It will also help you identify certain rules that will help you spot ‘red flag’ assignments.
What can I do to help prove I am outside of IR35?
There are some simple practices that would benefit all contractors who want to prove that IR35 does not apply to them and that they are not simply a disguised employee.
- Create a document that outlines exactly how each assignment places you outside of IR35.
You could detail your financial risk, the ways in which you fall outside of company structure and show that you control your own work schedule and practices.
- Take out business insurance.
HMRC will see your investment in business insurance, particularly professional indemnity as a sign that you are outside IR35. Paying money to protect your business interests is something a traditional employee simply doesn’t have to think about.
- Draw up a “confirmation of arrangements” document for your client.
This outlines the specifics of each work engagement so that you can show HMRC that you and your client are in agreement about the nature of your work with them. If you do fall under investigation then HMRC will personally interview your end-clients so it’s good to have everything clear and agreed ahead of time.
- Invest time and money in the promotion of your business.
Everything you can do to show that your limited company is an independent entity that requires a substantial financial risk on your behalf is a good argument that you’re IR35 exempt. So make that website, get the business cards and fancy letter-headed paper and know that what is good publicity also strengthens your company’s status as a commercial entity.
- Exercise your right of substitution.
It’s very important that HMRC sees your company as providing services on a business-to-business basis. This means that if you need to, your client should allow you to provide a qualified substitute to undertake the work in your stead. Having this clause written into your contract is an extremely useful way to prove that you operate in an entirely different mode to an employee.
If I get investigated for IR35, who will be looking after my case?
A lot of policies skew towards the insurance company nominating their choice of tax advisor. If you already work with an accountant, it might be advisable to see if they can work on your case as they have a more nuanced understanding of your finances.
That said, insurance companies often employ ex-HMRC inspectors so it could be that they have an understanding of the system that could heavily benefit your case. The main thing is that you investigate exactly what support is available and make an informed decision based on the needs of your business.
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