IR35 insurance promises to protect contractors from potential financial losses related to disputes over their employment status under the IR35 legislation in the UK. Whether IR35 insurance is worth it depends on your individual circumstances.
IR35 explained simply
If you’re reading this article, you’re probably already aware of the IR35 legislation and so we’ll only touch on the overview to lay down the foundation before getting into the details of whether IR35 insurance is worth it.
Many contractors, consultants and freelancers set up a limited company through which they receive their income. HMRC argues that often it is just a way to avoid tax and under the IR35 legislation it scrutinises this solopreneur sector of the UK economy.
In simple terms HMRC says that if you work like an employee, you’re an employee and as such should be taxed like an employee.
There are some criteria HMRC uses to determine whether you fall into this category. The principle ‘tests of employment’ are.
- Control: what degree of control does your client have over what, how, when and where you complete the work
- Substitution: is personal service by you required, or can you send a substitute in your place?
- Mutuality of obligation: mutuality of obligation is a concept where your client is obliged to offer you work, and you are obligated to accept it.
There are other circumstances that might be taken into account - are you taking a financial risk, are you getting involved in the running/management of your client’s organisation, are you in business on your own account and is there provision of equipment for you to do your work?
If you’re found to be doing any of the above, HMRC will class you as being inside the IR35 legislation and ask you to pay additional tax retrospectively.
What is IR35 insurance?
IR35 investigation insurance typically comes in two parts:
- Reimbursement of legal and professional fees incurred when fighting an HMRC enquiry into your tax affairs under the IR35 legislation.
- Protection against any extra tax including interest if you’re found liable under the IR35 legislation.
Additional benefits, provided at an extra fee, might be a review of your situation with regards to IR35. In fact some insurance providers insist that you take the test as it may later influence your ability to claim under your IR35 policy.
How does IR35 insurance work?
We have spent a lot of time reading through the fine print of the products that are currently available in the marketplace. And this is what you need to know:
Above 50% chances of winning
This is a very common condition stated in IR35 insurance products. If your chances of rebuffing the enquiry are assessed above 50%, you’ll get assistance from your insurers. However, if your case falls below this threshold, you’re on your own.
You have no say in the determination of your chances. In the event of an HMRC enquiry you’ll be required to submit relevant information to the insurers and wait for their decision. If you hide something to influence the decision and it later comes up in the discovery, your claim won’t be covered.
Passing the IR35 status review
Some insurance providers insist that your IR35 status is assessed and depending on the result, you’ll either enjoy the full extent of the cover or be subject to the “above 50% rate of success” rule.
However, the issue is that the IR35 test is only offered after you have purchased the insurance. If you then want to cancel because you were found inside the IR35 legislation, you may face cancellation charges.
No insurance can cover wilful or illegal act
Another important thing to remember is that you can’t insure yourself against a criminal or illegal act. IR35 is a piece of legislation and if, during the enquiry proceedings, you’re found to be knowingly navigating around it to avoid paying pax, your insurers will not pay your claim.
Is IR35 insurance a contractual requirement?
Some contractors have been recently told they must arrange IR35 insurance. If it has been made a condition of your contract, be very careful and ask more questions.
Contractors are shielded from the risk of being investigated by HMRC if the recruitment agency has the responsibility to determine the contract’s IR35 status. Should the recruitment agency make a mistake, under the IR35 legislation the recruitment agency would be liable for any extra tax demands by HMRC.
Check your contract
Some recruitment agencies have started passing the bucket down to contractors by including an indemnity clause in their work contracts. This indemnity clause allows a recruitment agency to recover any financial losses incurred by an HMRC investigation from you, the contractor. That is why some recruitment agencies insist that you buy IR35 insurance.
Check your contract for an indemnity clause allowing your recruitment agency to recover their financial losses under the IR35 legislation from you.
If you have been asked that your contractor insurance is to include IR35 insurance, read your contract. If you find a clause that says you will indemnify the recruitment agency against any incurred costs under the IR35 legislation, stop.
By signing this kind of contract you are exposing yourself to a significant financial risk. This approach of some recruitment agencies is highly unethical and you’re well within your rights to insist that those conditions are removed from your contract.
How much is IR35 insurance?
The last we looked it started from £99 for the core cover - i.e. legal and accountant expenses only. Some insurance providers offer IR35 assessment at an extra fee of about £30 or more and if you include the tax liability/interest element, your price might go up to £200 or more a year.
It’s a lot of money for an insurance policy that’s protecting you against one risk only. A risk that’s insignificant if your status is outside the IR35. In fact the risk is currently very low for contractors and freelancers. Therefore is IR35 insurance worth paying for?
The questions you should ask yourself
There are a few and once you do, you’ll know exactly whether IR35 insurance is worth it.
1. Why, if you’re indeed outside the IR35 legislation, should you pay for IR35 protection insurance against penalties and additional tax?
If your outside IR35 status is certain, either because it’s been assessed by a recruitment agency or your work falls outside IR35, you have little to worry about.
2. If you’re falling inside IR35 and your chances are unlikely to meet the 50% rule, then why are you paying for a product that's unlikely to offer you any legal assistance or protection?
If you have had your status confirmed as inside IR35, perhaps by your accountant or an independent IR35 assessment, then IR35 insurance is not going to be of help.
3. Is the IR35 legislation your only worry?
There are other risks contractors face - unpaid invoices, contract disputes, VAT enquiries or issues arising out of compliance and regulations are common. IR35 insurance only responds to claims brought under the IR35 legislation.
Is there an alternative to IR35 insurance for contractors?
If you have decided that IR35 insurance isn’t worth it, commercial legal expenses insurance can be a good alternative. It is a product designed to respond to a wide range of commercial and tax disputes and that would typically include IR35 investigations as well.
It’s important to remember that with standard business legal expenses, your chances of success are above 50% and the cover will not pay compensation or additional tax if you’re found liable.
No one wants to spend hours reading unfriendly insurance wordings but, irrespective of what product you choose in the end, there are two sections you definitely want to review as a minimum: exclusions and claim conditions. All insurance providers should give you easy access to the full wording (not just the cover summary!) before you buy.
