IR35 insurance is a policy designed to protect contractors and freelancers from the financial risks that come with being caught through HM Revenue and Customs (HMRC) as falling inside the IR35 tax rules. However, Is ir35 insurance worth it? Here’s a closer regard the pros and cons of this type of policy:
Is ir35 insurance worth it?
IR35 insurance is a type of tax insurance that can assist you in handling an IR35 inquiry from HMRC. It can cover the costs of legal representation, defence, and liabilities if you are found to be inside IR35. Whether it is worth it depends on your situation and risk appetite.
Some factors that may influence your decision are:
Your IR35 status: If you are confident that you are outside IR35, you may not request IR35 insurance. However, suppose you are unsure or have a borderline case. In that case, you may benefit from having some protection in case of an investigation.
Your contract value: If you have a high-value contract, the potential tax liabilities and penalties could be significant if IR35 catches you. IR35 insurance can assist you in mitigating this risk and evade paying more than you owe.
Your client’s attitude: If your client is supportive and willing to cooperate with HMRC, you may have an improved opportunity of defending your IR35 status. However, if your client is reluctant or hostile, you may face more difficulties and require more legal support.
Your peace of mind: If you are worried about IR35 and the possibility of an inquiry, having IR35 insurance can donate you some reassurance and confidence. However, if you are not concerned or stressed about IR35, you may not feel the require for IR35 insurance.
Ultimately, the choice is yours. You should weigh the pros and cons of IR35 insurance and decide what is best for your business.
Pros of IR35 Insurance
1. Protection from financial risks: IR35 insurance provides financial protection to contractors and freelancers in case they are found to be inside IR35 rules. This can include covering the cost of legal fees and other expenses associated with an investigation by HMRC.
2. Peace of mind: By having IR35 insurance, contractors and freelancers can know that they have protection against financial loss in the event of an IR35 investigation.
3. Enhanced credibility: Having IR35 insurance can enhance the credibility of contractors and freelancers in clients’ eyes, showing that they take their tax obligations seriously and are willing to take steps to protect themselves and their businesses.
4. Cost-effective: IR35 insurance can be a cost-effective way to protect against the risks associated with IR35, particularly for those who work on high-value contracts.
Cons of IR35 Insurance
1. Limited coverage: IR35 insurance policies can vary widely in terms of what they cover, with some policies offering limited coverage or exclusions for certain types of claims.
2. High premiums: IR35 insurance premiums can be relatively high, particularly for those who work on low-value contracts or have a history of IR35 investigations.
3. Limited availability: IR35 insurance is not widely available, with only a few specialist providers offering this type of policy.
4. Not a substitute for compliance: IR35 insurance should not be seen as a substitute for compliance with IR35 rules, and contractors and freelancers should still take steps to ensure that they operate outside of IR35.
What is IR35 insurance?
IR35 tax insurance covers contractors’ costs and liabilities during HMRC employment status investigations. IR35 standards decide whether a contractor is self-employed or a disguised employee of their customer. Contractors inside IR35 must pay greater taxes and National Insurance contributions like employees. IR35 insurance protects contractors from HMRC enquiries and helps them pay taxes, interest, and penalties. Contractor needs and risks determine IR35 insurance levels. Some IR35 insurance policies include an IR35 status evaluation, which evaluates the contractor’s contract and operating procedures to establish IR35 status. IR35 insurance can give contractors who use intermediaries like PSCs peace of mind and financial stability.
How does IR35 insurance work?
In the event of an IR35 investigation, IR35 insurance provides contractors with expert guidance and representation. Depending on coverage and risk profile, the contractor pays the insurance provider a premium. During the investigation, the insurance company will reimburse the contractor for legal and professional expenditures up to the policy maximum. Some IR35 insurance policies also cover tax bills, interest, and penalties if the contractor is found inside IR35.
Depending on the contractor’s needs and risks, IR35 insurance is provided. An IR35 status review determines the contractor’s IR35 status under some IR35 insurance policies. This can help the contractor avoid HMRC scrutiny or prove compliance.
Contractors who use intermediaries like personal service companies (PSCs) can benefit from IR35 insurance. However, IR35 insurance does not guarantee that the contractor will be outside IR35 or prevent HMRC from investigating. Therefore, contractors should always follow IR35 best practices and seek professional assistance if unsure.
Is there an alternative to IR35 insurance for contractors?
There are some possible alternatives to IR35 insurance for contractors. However, they may not be suitable or available for everyone. Some of these alternatives are:
Freelancer Limited Company (FLC): This is a proposal by IPSE, a trade association for freelancers and contractors, to create a new company structure for freelancers to provide certainty about their tax and employment status. To qualify as an FLC, freelancers must meet certain criteria and work under certain restrictions. This would mean they would not face the threat of IR35 investigation.
Engager’s tax: This is a suggestion by Demos, a think tank, to introduce a charge on companies that utilize freelance workers. The client would be liable to pay the employer’s National Insurance Contributions (NICs) on the fee they pay to the freelancer. This would reduce the incentive for companies to hire individuals who would otherwise fail the self-employment tests.
Working outside IR35: This is the option of ensuring that the contract and working practices of the freelancer are genuinely outside the scope of IR35. This would require careful assessment of the terms and conditions of the engagement, such as the level of control, substitution, and mutuality of obligation. Working outside IR35 would mean that the freelancer is responsible for their taxes and NICs.
These alternatives have advantages and disadvantages and may not be feasible or applicable in every situation. Therefore, it is advisable to seek professional advice before deciding on the best option for your circumstances.
How much is IR35 insurance?
The cost of IR35 insurance depends on the level of coverage and the provider you select. Some examples of IR35 insurance providers and their prices are:
Qdos Contractor: They offer two levels of cover, Tax Enquiry Insurance and Tax Liability Cover, which range from £8.25 to £25.00 per month.
Kingsbridge: They offer IR35 Protect, which includes legal expenses and tax liabilities cover, for £15.00 per month.
IR35 Shield: They offer IR35 Tax Loss Insurance, which covers the tax liabilities and penalties if caught by IR35, for £25.00 per month3.
Heath Crawford: They offer IR35 Liability Insurance, which covers the legal assistance and accountancy fees for defending your tax position, for £12.50 per month.
These are just some options available for contractors who desire to protect themselves from the risks of IR35. You may desire to compare different policies and providers to find the best one for your needs and budget.
Is ir35 insurance worth it? Who needs IR35 Insurance?
Contractors who work through their own limited company or other intermediary may desire IR35 insurance to shield themselves from IR35 inquiries. IR35 insurance can give expert advice and counsel and cover potential liabilities and penalties if they lose the lawsuit.
IR35 insurance is optional and does not ensure a contractor’s IR35 status. Contractors should nevertheless make sure their contracts and working methods reflect their true self-employment, such as taking financial risks, determining when and how they work, and having several clients.
Why is IR35 Insurance Important?
If you are found to be inside IR35, you may be liable to pay additional taxes and National Insurance contributions. This can be a significant financial burden, and it can also result in legal fees and penalties. IR35 insurance can help to cover these costs, providing you with peace of mind and financial protection.
In addition, having IR35 insurance can also help to demonstrate to clients that you are a professional contractor who takes their responsibilities seriously. It can provide clients confidence that you are operating within the law and that they are not exposing themselves to any legal risks by hiring you.
What does IR35 insurance cover?
IR35 insurance is a type of tax insurance that covers the costs and liabilities that may arise from an IR35 inquiry by HMRC. IR35 is a set of rules that determine whether a contractor is genuinely self-employed or a disguised employee of their client. Suppose HMRC finds that a contractor is inside IR35. In that case, employees may have to pay higher taxes and National Insurance contributions.
IR35 insurance can provide different levels of coverage depending on the policy and provider. Some of the benefits that IR35 insurance may offer are:
Defense costs: This covers the legal fees and expenses for defending your tax position in an IR35 inquiry. Some policies may also cover the costs of an IR35 contract review or assessment to help you prove your status.
Taxes, interest, and penalties: This covers the additional tax liabilities, interest charges, and penalties you may have to pay if IR35 catches you. Some policies may also cover the liabilities of your fee payer (such as your agency or terminated client) if they are held responsible by HMRC.
Expert representation: This covers the support and advice from a team of tax experts (including former tax inspectors) who can help you manage an IR35 inquiry and negotiate with HMRC on your behalf.
Is ir35 insurance worth it | Conclusion
So, is IR35 insurance worth it? Ultimately, the answer will determine various factors, including the nature of your work, the value of your contracts, and your previous experience with IR35 investigations. However, IR35 insurance can provide valuable financial protection and peace of mind for many contractors and freelancers in an uncertain tax landscape.