EasyTaxLive.com

Do Contractors Really Need IR35 Insurance?

The expression “IR35″ is only whispered in circles frequented by self employed contractors and freelancers, primarily because it’s likely to elicit one of two responses. Either their face will fill with dread and they will run shrieking to the horizon. Or they might smile contentedly and shrug, showing no real signs of fear. The latter will have taken out IR35 Insurance.

IR35 can be the source of constant concern for UK contractors and the threat of an HM Revenue and Customs (HMRC) investigation can be a heavy onus. Some may even remember the most famous HMRC case against Dragonfly Consultancy Ltd, which left the unfortunate company director with a tax liability of £99,000! So, it’s no surprize that most associate negative connotations with the four symbols I R 3 and 5.

Does it have to be like this, though? Take a deeper look into what it is, what it is actually supposed to do and how a self employed contractor can protect him/her self against it with a good insurance policy and suddenly it really isn’t all that bad. Honest!

IR35 was born in September 1999 and was put in place by the then Inland Revenue and Customs (now the HMRC) to close a tax loophole that was being expolited by Contractors and Freelancers throughout the nineties. This new legislation was put in place to stop “intermediaries” (i.e. composite companies and personal services companies) from avoiding tax.The new law stipulated that, where an intermediary was being employed by a corporation to carry out a service (IT consultancy or contract engineering services for example), and the employment relationship between the worker and their client would have normally been direct employment, the worker should pay tax and NICs like any other employee.

The key is to demonstrate whether a contractor is classified as inside or outside IR35 and this is where it can get a little technical. It boils down to whether a contractor has a contract “for” service or a contract “of” service. The former is where the individual is an indpendent self-employed contractor and the latter is where the individual is working for a client. When a contract “of” service is in place, IR35 is deemed applicable. When a contract “for” service is in place, it is not applicable and contractors can optimize their tax efficiency with an accountant that specializes in Freelancers and contractors.

So, if it’s all that straight forward, why all the fuss? Why the need for insurance? Well, as with all things it’s a question of risk moderation. HMRC carries out roughly 1,000 IR35 investigations a year. When you take into account that there are about 1,400,000 contractors and freelances in Britain, 1,000 doesn’t seem like much of a risk. Having said that, when an intermediary comes under the HMRC’s microscope it has to show its innocence and pay all of the legal costs for doing so. Also bear in mind that, in the event that it is found to be outside IR35, severe tax liabilites may be applicable (and let’s not forget about backdated interest).

So, taking all of this into account, it’s pretty clear why a contractor would want to take out comprehensive insurance to cover the unfortuneate liklihood of an HMRC investigation. There are plenty of insurance providers in this sector and a policy can cost up to £600 per annum. This amount is almost a drop in the ocean compared to the potential costs and strain that an probe could bring.

Find More Inland Revenue Articles