What is covered by IR35 insurance? Depending on the policy, IR35 insurance will cover the costs of hiring an expert to defend your case in an investigation, as well as the tax liabilities, fines, and interest that may arise if you are found to be working outside of IR35 as a consequence.
What is IR35 protection insurance?
Our IR35 Protect insurance is a market-leading policy that can be purchased separately or as an add-on to our core business insurance package. It primarily protects limited company contractors from the potentially crippling costs that can arise as a result of an IR35 investigation, such as legal fees, taxes, interest, and penalties deemed due by HMRC.
This cover is unusual in its ability to flex now that the IR35 reform has been implemented. It provides peace of mind across the supply chain by covering anybody HMRC deems liable in an IR35 investigation whether that’s you, your end client, or your recruiter. See the rates below, or fill out the call back form on this page to get an estimate from one of our brokers. Please keep in mind that in order for your IR35 Protect policy to respond in the case of a claim, you must have an up-to-date outside IR35 status decision.
Can you insure against IR35?
Contractors can take steps to limit the potential consequences of the private sector’s IR35 legislation, but can they insure themselves against IR35?
Yes, you can protect yourself against the cost of an HMRC investigation as well as the potential tax loss if HMRC successfully argues that your engagement falls under IR35, and if you insure with Caunce O’Hara, you can also ensure that you are protected against a variety of other potential liabilities.
Contractors should make sure they are properly insured at all times. If you’re a freelancer, you’ll almost certainly have both professional indemnity and public liability insurance, as both policies are frequently mandated in contracts before work is awarded.
We also provide a selection of IR35-specific insurance products at Caunce O’Hara, including:
Legal Expenses Insurance
In the event of an IR35 inquiry against you, Caunce O’Hara’s Legal Expenses Insurance covers you for legal representation costs up to £100,000 in any one claim.
There are two levels to the policy. Tier 1 refers to the policy’s core coverage, whereas Tier 2 refers to the optional coverage you can purchase.
IR35 Contract Review
When purchased with the Legal Expenses Insurance policy, Contract Reviews are only £60.00 per contract. The contract review will look at both the precise contract that the contractor signed and the contract’s operating procedures. Our partners have approved the processes of an IR35 Contract Reviewer who will conduct the review. The contract/engagement must pass the evaluation as being outside of IR35 and not subject to the IR35 Intermediaries Legislation.
Tax Losses Insurance
This policy will cover the net tax loss that happens when HMRC successfully argue that an Insured’s Qualifying Contract falls within the scope of IR35 based on the result of the IR35 Contract Review determining the contractor to be working outside IR35. Before the Tax Losses Insurance policy may be purchased, the contract review must “pass” the contract/engagement as being outside of IR35.
Professional Expenses Insurance
PEI is a type of insurance that must be purchased in conjunction with Tax Losses Insurance and ensures that an HMRC IR35 investigation can be competently fought by extending the notification time.
The notification period is the period of insurance during which the insured person is permitted to file a claim, including any extensions granted by the Professional Expenses Insurance and the renewal of the Professional Expenses Insurance, both of which are purchased with the Tax Losses policy.
The insured person must continue to renew their PEI even if they are not working on any contracts; else, the Tax Losses Insurance policy would be invalidated.
Who does IR35 cover?
IR35 is a term that refers to two pieces of tax legislation aimed at preventing tax avoidance by workers and employers that provide services to clients through an intermediary, such as a limited company, but would be considered employees if the intermediary were not utilized.
What can you claim inside IR35?
The 5% cost allowance is the most neglected IR35 component. This is set up by HMRC for contractors who are covered by the Act. Contractors will be able to recoup 5% of their earned income under the allowance. It should be sufficient to meet a company’s operating expenses. However, this rule was recently repealed for public-sector contractors, and it will be repealed for private-sector contractors starting April 6, 2021. You must now pay taxes in the same manner as other employees.
Contractors operating under IR35 can continue to claim tax savings on pension contributions made on their behalf by the PSC, regardless of whether they work in the private or public sector.
Contractors working inside IR35 should avoid claiming common expenses including travel, mileage, motels, and meals owing to recent changes to travel and subsistence (T&S) allowances. HMRC is on the case, and any incorrectly recorded T&S expenses will be classified as earnings, requiring you to pay tax and national insurance contributions.
Expenses for which a contractor could have claimed a deduction against their earnings under normal employment income rules are also allowed if the contractor worked for the client at some point and paid for those expenses with those earnings. Employment expenses, on the other hand, are notoriously difficult to claim because they must pass the wholly, exclusively, and necessarily test. To put it another way, they must be absolutely required for the performance of job responsibilities. In many circumstances, the Contractors fail to meet HMRC standards.
Also see: What Expenses Can You Claim When Working From Home During A Coronavirus Epidemic?
What is the IR35 fine?
In April 2009, the new IR35 penalty scheme went into effect. Prior to this date, most of a contractor’s tax responsibility was negotiable, and the new guidelines intended to standardize the severity of penalties.
Contractors caught inside IR35 with an incorrectly designated employment status will be required to pay the following:
- If HMRC determines that you were careless with your employment status but did not realize it was inaccurate, you will face a penalty of 30% of the unpaid tax.
- If HMRC discovers that you were aware that you were in IR35 but chose not to act, you will face a penalty of 70% of unpaid tax.
- If HMRC discovers that you attempted to conceal your IR35 status and underpaid tax, you will be fined 100% of the unpaid tax.
What is QDOS assessment?
Our expert IR35 advisors with 20 years of experience in completing decisions and defending cases conduct case-by-case IR35 assessments of your contractors as part of our Status Review service:
- Our consultants are available to talk about any difficulties or to aid in discussions about assessment results.
Each month, Qdos examines over 2,000 engagements for IR35 compliance, and it is well-known in the contractor market as a leading expert, having defended over 1,600 inquiries and analyzed over 150,000 contracts and working practices for IR35 compliance.
*Qdos conducts role assessments for businesses to determine what to expect during the hiring process. To ensure compliance with the law, each engagement should be examined on an individual basis.
What is an intermediary IR35?
When a worker is hired to work for someone else, they may deal directly with that person’s client, with no third party or entity involved in any manner. Alternatively, a third-party intermediary may be used as part of the arrangements in some situations. Where there is an intermediary, the worker may be treated as employed, self-employed, or, in the case of IR35 (see below), as if employed by the client, depending on the circumstances. However, their legal status may be unclear in some circumstances. (For “employment intermediaries,” see “Employment agency or firm” below.)
The worker’s own personal service business (“PSC”), which acts as an intermediary between the worker and their clients, is frequently utilized as the third party. The PSC is the only one who contracts with clients, not the worker.
The most common motivation for a worker to use a PSC is to obtain a tax/NIC benefit (see below) in comparison to working as an employee or as a self-employed individual.
A PSC is usually made up of two directors or one director plus the Company Secretary (who are often husband and wife). Other than those two people, there are usually no other employees, and one of them is usually the only one offering services to their client. The PSC makes all or nearly all of its money through providing clients with the worker’s services. In each situation, the PSC and the client (either directly or through an agency) have a contract under which the PSC is compensated for providing the worker’s services. The worker receives (or is entitled to receive) income or benefits from the PSC, which are often in the form of PSC share dividends rather than any or all significant salary payments.
If a person is self-employed rather than employed in the United Kingdom, they pay a reduced level of income tax and/or national insurance contributions (“tax/NIC”); and if they operate through an intermediary, they may pay an even lower level of tax/NIC.
Many years ago, it was standard practice for individuals to supply their services through a PSC to save tax and NICs, particularly in the IT and media sectors. Despite the fact that the PSC had to pay Corporation Tax, there was frequently a net savings when a worker received only or primarily dividends, because no NICs were required on dividends, and there was sometimes no tax to pay on dividends (depending on the amount of the dividends).
Since its implementation in 2000, the “IR35” has earned a reputation for being renowned and tough.
The issue is regulated by IR35 guidelines when a worker provides his services to a client through a PSC. The basic premise utilized by IR35, as stated below under “Employed/Self-employed,” is that when someone works through a PSC, they are treated as employed, whereas if they had worked as an individual (rather than through a PSC), they would have been recognized in law as employed, not self-employed.
The goal of IR35 was to prevent tax/NIC avoidance in the case of an employee, and it has been gradually tightened over time, with the result that, depending on their specific circumstances, workers may now earn little or no benefit from working through a PSC.
The tax regime imposes a greater tax burden on dividends paid by PSCs than it did prior to 2016, and tax relief on travel and subsistence expenses spent by an IR35 worker is limited.
HM Government may take additional IR35-tightening measures in the future to reduce IR35 non-compliance.
Future possible changes to tighten up IR35 could include declaring freelance contractors to be employees after a month of work for a client, creating a statutory test for whether or not someone is to be considered self-employed, treating workers as if they are employed (see below) where they are subject to supervision, direction, or control from their client, and/or aligning income tax and NIC rates, among other things.
While the tax-related IR35 requirements are distinct from the NICs-related rules, they are extremely similar. The following information applies to both taxes and NICs.
For its purposes, IR35 applies to what it describes as a “intermediary.” Although a “intermediary” can be a company, a partnership, an unincorporated organisation, or another person, this note focuses on companies because it is assumed that the client/employer will more typically contract with a PSC rather than a non-corporate form of intermediary.
In a nutshell, a corporation (usually a PSC) is a “intermediary” if the following requirements are met in regard to the worker who provides the client’s services:
- The worker receives or is entitled to a payment or benefit from the PSC that is not taxable as employment income; and
- The PSC is not a client’s “related” firm (as defined in Section 449 of the Corporation Taxes Act 2010); and
- Either the worker has a “material interest” in the PSC, or the payment or benefit can “fairly be considered to reflect” recompense for the client services the worker delivered. The worker and/or the worker’s “associate(s)” have a “material interest” if they hold or control more than 5% of the ordinary shares of the PSC.
The underlying nature of a worker’s connection with a client must be evaluated under IR35. One of the most important considerations is whether the worker would have been an employee of the client in law if they had not been hired through the PSC intermediary, that is, if the worker would have been an employee if they had contracted directly with the client to do the activity in question. IR35 will not apply until this test is passed first, and it is not a simple test to pass. Each case is unique and is based on its own set of circumstances. In comparison, the other examinations (which must also be passed for IR35 to apply) are much easier to comprehend and apply in practice.
There is no current HMRC guidance that can be used to determine if an intermediary (PSC) is a true business entity, i.e. whether a worker is legitimately self-employed or should be treated as though hired by the client, so that IR35 is applied (assuming all other IR35 tests are also passed).
Although there is some case law on the subject of whether IR35 applies to any arrangements between a customer, a worker, and a PSC, case law is of limited use when determining whether IR35 applies in a specific situation because the position in each case depends on its own facts. As a result, we have made no reference to or discussion of any IR35-related case law decisions in this notice.
In general, if an agreement between a worker and a customer allows the worker to substitute someone else for any part of the work, that feature could be considered one of the indicators of prospective self-employment see the information pages Indicators of employment and Indicators of self-employment. Where there is a PSC intermediary, however, if the worker is in fact “Even if the worker has the right under client-PSC agreements to substitute someone else for themselves, that factor cannot be taken into account for IR35 purposes when determining whether they are to be treated as if they were employed by the client. In the IR35 context, the fact that they really do all of the work themselves will tend to imply deemed employment (rather than self-employment).
When IR35 is in effect, the PSC’s earnings from the client’s work are treated as the worker’s earnings, which are taxed as employment income and subject to Class 1 NICs (called for this purpose an employer’s NICs) “The PSC has made a “employment payment” to them. Long and comprehensive calculations are included in IR35 to compute the amount and period of receipt of this considered payment “Each person who works for the PSC receives a “employment payment.”
IR35 has an impact on other areas of taxation and must be considered in a variety of situations, including self-assessment and corporation tax returns.
We haven’t discussed IR35 in connection to advantages received by PSCs/workers other than monetary payment because we don’t want to make this note any longer, but it’s vital to remember that IR35 covers such perks as well, so they’ll be subject to tax and NIC liability as well.
Managed service businesses are exempt from IR35 ( “MSCs”), as well as a few composite service providers. MSCs are subject to distinct anti-avoidance tax and NIC rules. This regulation includes tests that are special to MSCs.
Although employment agencies and enterprises are beyond the subject of this article, please be aware of the following issues for completeness.
When a third-party entity is operating as an agent for you, “The agency is not the worker’s employer; the person or organization to whom the agency refers him for that purpose is the worker’s employer. That introduction is solely for the purpose of allowing the worker to be employed rather than self-employed. Compare this to the situation where a third-party entity is acting as an agent “Working for a living.” The worker is neither self-employed nor employed by the person or organization to whom he or she offers services in this scenario. The worker is hired by an employment agency, which subsequently provides their services to a customer.
There are, however, some exceptions “The term “agency rules” refers to a set of guidelines that can be applied to a job agency or a company. Where those requirements apply, such businesses are in charge of ensuring that workers’ tax and NIC are paid correctly. HMRC has issued guidance on the subject (dated September 23, 2015) “www.gov.uk/guidance/employment-status-employment-intermediaries/agency-rules
Who is exempt from IR35?
For end-clients, there is an IR35 small business exemption: a “small business” is defined as any business that meets two or more of the following criteria: annual revenue is less than £10.2 million. The total amount on the balance sheet is no more than £5.1 million. There should be no more than 50 people working for you.
Does IR35 affect self-employed?
IR35 does not apply to single traders because the regulation only applies to incorporated businesses. However, everyone who delivers a service to a client, even sole traders, is affected by the laws concerning designation of employment status, which are closely linked to IR35.
Under the new laws, the company receiving your services is responsible for classifying your self-employed status as a sole trader, and the firm might be held liable if an HMRC investigation uncovered evidence that your employment status was erroneously marked.
Employment status, like whether a worker is inside or outside IR35, is determined by the kind of the work you do and whether you have enough control over your own work to be called self-employed. Sole traders operate in a way that is highly unlikely to fall within IR35.