Why contractors need IR35 insurance
IR35 insurance is depended on by many UK contractors, to protect themselves against the risks of an IR35 investigation from HMRC.
It’s unknown how HMRC go about identifying which companies to investigate. This means that self-employed contractors cannot predict when, or if, they’re going to be subjected to an investigation.
With this uncertainty, IR35 insurance can give contractors some reassurance in knowing that whatever the potential costs of an IR35 enquiry, they’re protected.
Will contractors need IR35 insurance after the 2021 reform?
Even after the private sector IR35 reform on April 6th 2021, IR35 insurance will remain essential for contractors.
The private sector changes will mean that from April 2021, contractors working with medium and large private sector businesses will no longer carry the IR35 risk.
The IR35 risk will instead be placed on the fee payer. If you are engaged directly, the fee-payer is the client. If you are instead working with a client through an agency, the fee payer is the agency.
Technically, this means that if you have taken out an IR35 insurance policy, you do not need it to cover these contracts – seen as though you no longer have the liability, but it’s not quite as simple as that.
HMRC can investigate contracts from up to 6 years ago
If they wish to do so, HMRC can open an IR35 inquiry into a contract that the contractor undertook up to six years ago. This means that despite the 2021 changes to IR35, you are still at risk of an IR35 investigation.
Inquires can even be opened into contracts older than six years if HMRC believe there is evidence of deliberate tax avoidance.
If an investigation from HMRC results in them finding you guilty of non-compliance for a previous contract, you could end up facing thousands of pounds in taxes and penalties. Without IR35 insurance, you would be left to pay this bill out of your own pocket.
HMRC will also be able to investigate contracts that move from outside IR35 to inside IR35 when fee-payers begin overseeing the new rules, if it suspects foul-play or criminal behaviour.
HMRC have stated there is evidence that a vast number of contractors in the pharmaceutical industry have wrongly categorised their employment status.
Contracting for small businesses
If you’re a contractor engaging with small private sector businesses, it’s important to remember that they are exempt from the 2021 reform.
This means that contractors engaging with small businesses will remain responsible for deciding their own IR35 status and will retain liability.
What defines a business as small enough to be exempt from the 2021 reform?
A ‘small organisation’ is defined as a company meeting two of the following requirements:
- Net turnover below £10.2 million
- Balance sheet totalling less than £5.1 million
- Less than 50 employees
IR35 insurance is available to contractors in a number of forms including Legal Expenses Insurance and Contract Reviews (including Statements of Work), which can cover the fees of advice, legal representation, plus any resulting tax liabilities and penalties.
For more information about IR35 concerns, please contact Markel Tax's specialist team on 0345 0660 035.
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