IR35 insurance – tax investigation cover for contractors

As most IT contractors are aware, if your contracts are caught by IR35, then your finances will take a serious hit.

In this guide, we look at how you can insure your company against the costs of defending an HMRC IR35 investigation.

Why would you need IR35 investigation insurance?

IR35 was created to tackle ‘disguised employment’. This happens when an individual provides professional services to a client via their own limited company, but works in the same way as a traditional employee.

In other words, they work under the supervision and control of a client – not in a ‘business-like’ manner.

HMRC bases its definition of ‘disguised employment’ on many factors – including employment status rules as well as a growing number of court rulings and precedents.

Understandably, many contractors take out IR35 insurance (which is often referred to as ‘tax investigation insurance’) to cover them in the event of a status challenge by HMRC.

Over the past 24 years since IR35 became law, a burgeoning employment status industry has been established. Several specialist firms provide insurance to cover both the costs of professional representation, plus any taxes you are found to owe.

The leading provider of IR35-related cover is Qdos which offers two groundbreaking products:

1. Tax Enquiry Insurance (IR35 Insurance)

Most  IR35 enquiries start with a PAYE compliance visit or an enquiry from a tax return and could possibly end up at a Commissioners’ Hearing.

For this reason, Qdos offers Freelancer Tax Protection, affording total peace of mind in the event of a PAYE compliance visit or enquiry.

Your case will be handled by an experienced consultant who will deal with all HMRC correspondence from start to finish.

This product covers legal representation costs of up to £50,000 and can cover previous tax years too (retroactive cover).

All this for a premium of £99 (£8.25 per month) – including Insurance Premium Tax – per year.

2. Tax Liability Cover (TLC35)

Qdos TLC35 covers not only the representation costs listed above but also any additional tax, NIC, interest and penalties arising from an HMRC enquiry.

This provides contractors with a financial umbrella against the ever-increasing risk of enquiry.

  • TLC35 includes unlimited contract reviews.
  • All claims are handled by ex-HMRC inspectors.
  • Qdos has successfully defended over 1,500 claims.
  • This is the most comprehensive IR35 protection product on the market
  • Cover starts from £16.58 per month (£199 per year), depending on the indemnity level you choose.

Employer Compliance Reviews and IR35 enquiries

Here, our long-term contributor, Seb Maley (MD of Qdos), explains how the Employer Compliance Review process typically works.

Historically many IR35 enquiries originate from Employer Compliance Reviews (ECR), which is a routine inspection of a company’s PAYE affairs.

With contractors, HMRC used to use them as a ‘foot in the door’ to pursue IR35 matters.

The officers undertaking the initial review would often gather basic information about the contractor’s engagements and then pass it over to a specialist status inspector to deal with from there.

Following the changes to the way IR35 is administered, HMRC are now more direct with letters informing contractors of an impending IR35 review (an enquiry by any other name), bypassing the ECR route.

At the start of each review, HMRC will ask ‘Have you considered IR35? If so why do you consider yourself to be outside of IR35? Please provide evidence to support this answer’.

This evidence will include details of the contractor’s previous engagements; the names of end clients, agencies and contract dates and details of actual working practices.

If the evidence is unsatisfactory or HMRC feel they need to test it, they are likely to want to speak to the end-user themselves to get their view on how the contractor worked and was treated in reality. If this is unsupervised you could be leaving yourself exposed.

HMRC will also not be slow to use their statutory powers of enquiry to extract information should the need arise.

IR35 Insurance – FAQs

I’m an umbrella employee. Do I need cover?

If you contract via an umbrella company, you already pay full employment taxes, so IR35 is never an issue.

If you’ve worked via your own company in the recent past, it might be worth having cover, as HMRC can launch an investigation into your tax affairs going back at least 4 years into the past.

I’m not affected by IR35, so why take out tax investigation insurance?

If you’re not providing personal services via your company, or you’re not responsible for determining your employment status (due to the off payroll rules), you might still consider taking our cover.

As we mentioned above, you will benefit from cover against tax enquiries into previous tax years.

Tax investigation cover also protects your company from the costs of defending a claim into a whole range of potential HMRC enquiries, including PAYE and VAT.

Further Information

To find out more about IR35 and legal protection, please visit Qdos.

As well as taking out IR35 cover, we also recommend you submit all contracts to a professional IR35 contract review service (Qdos also provide this).

You should ensure that both the wording of your contracts, plus your working practices (how you carry out your contract work) demonstrate that you are acting in the manner of a self-employed contractor, not a ‘disguised employee’.

Professional Indemnity Insurance for Contractors

Industry leading PI insurance - from just £13.50 per month via Qdos. Business liability and IR35 insurance cover also available.

Last updated: 9th February 2024