IR35 insurance – tax investigation cover for contractors

As most IT contractors are aware, if your contracts are caught by IR35, the financial impact on your take-home pay can be significant.

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

Important: IR35 investigation insurance is primarily relevant for contractors operating under the Chapter 8 IR35 rules, where the contractor’s limited company is responsible for determining employment status.

This typically applies where the end client qualifies as a small company. Where the off-payroll (Chapter 10) rules apply and the client determines IR35 status, the tax risk usually sits with the fee-payer rather than the contractor.

Why would you need IR35 investigation insurance?

IR35 was created to tackle ‘disguised employment’, which occurs 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 purchase IR35 insurance (often referred to as ‘tax investigation insurance’) to protect them if HMRC challenges their status.

Over the past 25 years, since IR35 became law, a specialist employment status industry has developed. Several firms now provide insurance products covering the costs of professional representation and, in some cases, any taxes you are found to owe.

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

1. Legal Expenses Insurance (including IR35 Insurance)

Most IR35 enquiries historically began with a PAYE compliance visit or enquiry from a tax return and could end up at a Commissioners’ hearing.

For this reason, Qdos offers Legal Expenses Insurance, which provides support and representation if your company faces an HMRC enquiry.

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

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This product covers legal representation costs of up to £50,000 and may also provide cover for enquiries relating to previous tax years.

It may also include cover if you are required to serve on jury duty.

Premiums start at around £5.88 per month including insurance premium tax.

2. Tax Liability Cover (TLC35)

Qdos TLC35 covers the representation costs listed above and any additional tax, NIC, interest and penalties arising from an HMRC enquiry.

This provides contractors with a financial umbrella against the risk of an IR35 investigation.

• TLC35 includes unlimited contract reviews.
• Ex-HMRC inspectors handle all claims.
• Qdos has successfully defended over 1,500 claims.
• This is one of the most comprehensive IR35 protection products available.
• Cover starts from around £16.58 per month (£199 per year), depending on your indemnity level.

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 originated from Employer Compliance Reviews (ECR), which are routine inspections of a company’s PAYE affairs.

With contractors, HMRC sometimes used these reviews 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 on to a specialist status inspector to handle.

Today, HMRC will often write directly to contractors where it believes an engagement may fall within IR35.

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 and agencies, 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.

HMRC will also not hesitate to use its 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 generally not an issue.

If you’ve worked via your own company recently, it might still be worth having cover, as HMRC can launch an investigation into your tax affairs going back several years.

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 out cover.

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

Tax investigation cover can also protect your company from the costs of defending a range of HMRC enquiries, including PAYE and VAT.

Further Information

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

We recommend that you take out IR35 cover and submit all contracts to a professional IR35 contract review service.

You should ensure that both the wording of your contracts and your working practices demonstrate that you are acting like a self-employed contractor rather than a ‘disguised employee’.