Independent professionals contracting with public sector bodies (PSBs) via limited companies are being advised to consider IR35 insurance to help pay for their legal defence and any tax liabilities should they become subject to an HMRC investigation.
Rebooted IR35 rules, which came into effect in April this year, are part of the Government’s ongoing clampdown on what it and HMRC perceive as “disguised employment.” However, the process of determining a contracting professional’s IR35 status is exceedingly complex, and many PSBs and contractors are dissatisfied with the Revenue’s own online Employment Status Service.
The issues involved in determining IR35 status are labyrinthine. IR35 insurance has been developed to help limited company contractors find legal representation to defend their tax status if they become subject to an HMRC review.
Seb Maley, CEO of Qdos Contractor, which offers such insurance, explained to online IT news source ITPro what contractors should look for.
A good policy, he said, should include cover for legal defence costs so that an expert can fight in the contractor’s corner from the outset of the investigation, manage the case and communicate directly with the Revenue. Ideally, it should also include indemnity against IR35 liabilities should the case be lost so that all of the backdated tax is paid for.
Costs incurred by a contractor who loses an IR35 defence include interest added to outstanding tax, National Insurance Contributions and fines imposed by HMRC. According to ContractorCalculator, insurance is a relatively cost-effective means of offsetting a failed IR35 defence, which on average will result in contractors paying 25 per cent more tax on their future earnings of the affected contract.
Mr Maley added: “With IR35 at the top of HMRC’s agenda, the need for insurance has never been greater.
“IR35 is a complex and continuously evolving legislation, which can easily be misinterpreted. Insurance brings peace of mind should a contractor be subject to an investigation by HMRC, with the option of covering any tax or NIC (National Insurance Contributions) liabilities, interest and penalties should you be ‘caught’ by IR35.”
In an article for ITPro last week, however, James Poyser, CEO of contractor tax specialists inniAccounts, urged contractors to take a more pragmatic approach to IR35 rules and accept that on occasion, a contract opportunity offering an excellent team environment, stimulating challenges and a great pay rate that happens to be inside IR35 is worth seizing.
Mr Poyser reminded professional contractors that, in surveys, taxation appears well down their list of priorities, way below flexibility and good work/life balance. This is possibly why many contracting professionals are turning to compliant PAYE Umbrella Companies to continue working flexibly on great contracts in the public sector.