IR35 insurance
IR35 insurance helps contractors manage the professional and financial risks associated with an HMRC IR35 enquiry.
Depending on the type of policy and its terms, it can cover specialist representation during an investigation and, in some cases, the tax liability if an engagement is found to fall inside IR35.
Why contractors take out IR35 insurance
If you work through your own limited company for a small non-public-sector client, responsibility for applying the IR35 rules generally remains with your intermediary under Chapter 8 of the legislation.
HMRC can open a compliance check into the IR35 treatment of an engagement, subject to the normal statutory time limits. If HMRC concludes that an engagement fell inside IR35, it may seek additional PAYE and National Insurance, together with interest and, where applicable, penalties.
This is where IR35 insurance becomes relevant.
A policy can provide specialist representation to deal with HMRC on your behalf if an enquiry starts. Instead of managing the investigation yourself, experienced tax professionals can handle the correspondence and help present your case.
Contractor policies can typically include:
- Specialist representation during an HMRC enquiry.
- Professional advisers dealing with HMRC correspondence.
- Advice on contracts and the circumstances of the engagement.
- Support during any appeal process.
Contract reviews remain important, but they cannot entirely prevent an enquiry. In an IR35 tax case, the contractual terms must first be established using ordinary principles of contractual interpretation before the employment status tests are applied. Other relevant evidence and circumstances surrounding the engagement may also be considered.
Insurance can ensure that, if scrutiny does occur and the circumstances fall within the policy terms, you are not dealing with it alone.
Types of IR35 insurance contractors can buy
Most contractor policies fall into two broad categories. Some cover the professional costs of defending an enquiry, while others can also cover the tax liability if an engagement is ultimately found to fall inside IR35.
Traditional contractor tax liability insurance is primarily relevant where responsibility remains with the contractor’s intermediary under Chapter 8. Under Chapter 10, statutory PAYE and NIC liabilities generally rest elsewhere in the supply chain, and separate insurance products may be available for clients and fee-payers.
Understanding the difference between these approaches helps contractors choose the right level of protection.
IR35 Tax Liability Cover
Comprehensive protection.
Tax Liability Cover (often shortened to TLC) is the most comprehensive type of IR35 insurance available to contractors.
Depending on the policy terms, it can cover the cost of defending an HMRC investigation and may also cover the tax liability if an engagement is ultimately found to fall inside IR35.
- Professional representation during an HMRC IR35 enquiry
- Specialist advisers dealing directly with HMRC
- Cover may be available for Income Tax and National Insurance if a case is lost
- Cover may extend to interest and penalties, subject to the policy terms
- Advice on contracts and the circumstances of engagements
Provided by IR35 specialists Qdos.
IR35 Legal Protection Insurance
Representation during an enquiry.
Legal Protection Insurance can cover the professional costs of defending an IR35 enquiry.
If HMRC opens an investigation, the policy can provide specialist representation and advice throughout the enquiry process, subject to its terms.
- Professional representation during an HMRC enquiry
- Specialist tax advisers can handle communication with HMRC
- Support throughout the investigation and appeals process
- Cover for professional fees associated with defending the case, subject to the policy terms
Provided by IR35 specialists Qdos.
What IR35 insurance does not usually include
The terms of cover vary between insurers. Policies may contain exclusions relating to inaccurate information, failure to follow professional advice, pre-existing enquiries, or circumstances that fall outside the policy’s eligibility criteria.
Some tax liability policies may also require an acceptable IR35 status or engagement review as a condition of cover. The precise underwriting requirements vary between providers and policies.
Policies may also limit claims relating to older engagements or arrangements that fall outside standard contracting structures.
Reading the policy wording carefully is important so you understand exactly what situations are covered.
How an IR35 enquiry typically unfolds
HMRC enquiries usually begin with a request for information. Contractors may be asked to provide contracts, invoices, and explanations or other evidence relating to the engagement.
Investigators will normally focus on the contractual relationship and the core employment status tests, including control, substitution and mutuality of obligation, together with other relevant factors.
HMRC may also contact the client directly to obtain evidence about the engagement and help establish the relevant contractual terms and circumstances.
These enquiries often move slowly and may progress through several stages before a conclusion is reached. Having professional representation in place can help keep discussions focused on the relevant status issues.
For more background, see our guide to IR35 investigations and the history of IR35.
Practical examples
Contractor under Chapter 8
A contractor working through a PSC for a small non-public-sector client receives an HMRC letter asking about the IR35 position of an engagement. Subject to the policy terms, contractor IR35 insurance can provide professional advisers to manage the enquiry and deal directly with HMRC.
Contractor with tax liability cover
HMRC challenges the IR35 treatment of a Chapter 8 engagement and ultimately establishes that it fell inside IR35. Depending on the policy, tax liability cover may meet some or all of the resulting covered PAYE, NIC, interest or penalties, subject to the policy terms and limits.
Client or fee-payer under Chapter 10
A medium or large organisation makes outside IR35 determinations under Chapter 10 and HMRC later challenges an engagement. The statutory tax risk under Chapter 10 generally sits with the relevant client or fee-payer rather than the contractor’s PSC. Separate corporate IR35 insurance products may be available to protect organisations against these risks.
How much does IR35 insurance cost?
Contractor policies that only cover the professional cost of defending an enquiry can cost well under £100 per year.
More comprehensive policies that can also cover potential tax liabilities are usually more expensive because they insure against a much larger financial risk.
Premiums vary depending on factors such as the type of work performed, contract arrangements, underwriting requirements, and the level of cover selected.
Do you need IR35 insurance?
Contractors working through their own limited company can still face an HMRC IR35 review. This is particularly relevant when working for small non-public-sector clients, where responsibility for applying the IR35 rules generally remains with the contractor’s intermediary under Chapter 8.
Insurance does not remove the risk of an investigation, but it can provide professional advisers to handle the process and, depending on the policy, may also protect against the financial outcome.
For many contractors, the cost of cover is relatively modest compared with the potential cost and stress of managing an enquiry alone.