Insurance 101
June 2022

Is IR35 insurance worth it?

A question that has recently risen in popularity among contractors as a result of the updated private sector IR35 legislation. Previously HMRC was mostly focusing on the larger companies but now they’re turning up the heat and individual contractors are very much in the spotlight.

Man and woman in the office talking about IR35.
Insurance priced in a jiffy.

Inevitably freelancers and contractors worry and are looking for ways to protect themselves against an HMRC probe. Therefore we have sat down and read cover to cover the wordings behind some of the IR35 protection insurance products that are currently on offer so that we can share some thoughts on the matter and hopefully offer you enough information to make the right decision for yourself.

Contractors caught inside IR35

There have been plenty of high profile cases where HMRC attempted to or did claw a substantial amount of tax from contractors under the IR35 legislation. Some examples are:

  • Paul Hawksbee
  • Eamonn Holmes
  • Neil McCann
  • Dave Clark

HMRC, just like any other business, is focusing on profitable areas. The above names earn well and have the entertainment industry in common. Once HMRC secured one victory, it has then continued to pursue others in similar situations and, sadly, not without considerable success. It’s only a matter of time before they zoom in on the rest - IT contractors, business consultants and freelancers. Once they manage to get one, they’ll issue letters to all that they think fit inside the IR35 criteria.

IR35 explained simply

If you’re reading this article, you’re probably already aware of the IR35 legislation and so we’ll only touch on the overview to lay down the foundation before getting into the details of how insurance fits in.

Many contractors, consultants and freelancers run their own business, either as sole traders or limited companies. HMRC argues that often it is just a way to avoid tax and under the IR35 legislation it scrutinises this solopreneur sector of the UK economy.

In simple terms HMRC says that if you work like an employee, you’re an employee and as such should be taxed like an employee. There are some criteria HMRC uses to determine whether you fall into this category. The principle ‘tests of employment’ are.

  • Control: what degree of control does your client have over what, how, when and where you complete the work
  • Substitution: is personal service by you required, or can you send a substitute in your place?
  • Mutuality of obligation: mutuality of obligation is a concept where your client is obliged to offer you work, and you are obligated to accept it.

There are other circumstances that might be taken into account - are you taking a financial risk, are you getting involved in the running/management of your client’s organisation, are you in business on your own account and is there provision of equipment for you to do your work?

If you’re found to be doing any of the above, HMRC will class you as being inside the IR35 legislation and ask you to pay additional tax retrospectively.

What is IR35 insurance?

IR35 investigation insurance typically comes in two parts. The core cover of IR35 insurance is the reimbursement of legal and professional fees incurred when fighting an HMRC enquiry into your tax affairs under the IR35 legislation.

The second part, usually optional, is protection against any extra tax including interest if you’re found liable under the IR35 legislation. And this is the temptation for contractors and freelancers to consider IR35 insurance. After all who wouldn’t want a protection shield against an HMRC enquiry. Your insurance premium for this element is determined on the limit you select, usually starting at around £20,000. The higher the limit, the higher the premium.

Additional benefits, provided at an extra fee, might be a free review of your situation with regards to IR35. In fact some insurance providers insist that you take the test as it may later influence your ability to claim under your IR35 policy.

How does IR35 insurance work?

Unfortunately it’s not as straightforward as you might think. If you get investigated by HMRC, you may discover that your insurers start referring to a lot of small print in your policy documentation.

As we mentioned above we have spent some time reading through all the print of the products that are currently available in the marketplace. And here’s what you need to watch out for:

Above 50% chances of winning

This is a very common condition stated in IR35 insurance products. If your chances of rebuffing the enquiry are assessed above 50%, you’ll get assistance from your insurers. If your case falls below this threshold, you’re on your own.

You have no say in the determination of your chances. In the event of an HMRC enquiry you’ll be required to submit relevant information and wait for the decision. If you hide something to influence the decision and it later comes up in discovery, your claim won’t be covered.

Passing the IR35 status review

Some insurance providers insist that your IR35 status is assessed and depending on the result, you’ll either enjoy the full extent of the cover or be subject to the “above 50% rate of success” rule. However, the issue is that the IR35 test is only offered after you have purchased the insurance. If you then want to cancel because you were found inside the IR35 legislation, then you’re faced with cancellation charges.

No insurance can cover willful or illegal act

Another important thing to remember is that you can’t insure yourself against a criminal or illegal act. IR35 is a piece of legislation and if, during the enquiry proceedings, you’re found to be knowingly navigating around it to avoid paying pax, your insurers will not pay your claim.

The questions you should ask yourself

There are a few and once you do, you’ll know exactly whether IR35 insurance is worth it.

1. Why, if you’re indeed outside the IR35 legislation, should you pay for IR35 protection insurance against penalties and additional tax?

HMRC can still try to look into you but if your status is certain, they’re likely to fail and so far the statistics show they have failed in the majority of cases. Of course you’ll still incur some legal and professional fees but as we said above many commercial legal expenses products will provide the necessary legal and accountancy assistance..

2. If you’re falling inside IR35 and your chances are unlikely to meet the 50% rule, then why are you paying for a product that's unlikely to offer you any legal assistance or protection?

You yourself know best how you deliver your services and there are plenty of free IR35 tests online which indicate to you your tax status. That will give you a good gauge whether the IR35 tax investigation insurance product is of any use to you.

3. Is the IR35 legislation your only worry?

IR35 risks aside, what about other commercial or tax disputes? There are many that contractors and freelancers face. We’ve already mentioned unpaid invoices but there are also situations such as contract disputes, VAT queries or issues arising out of compliance and regulations. Purchasing a specialised insurance product against IR35 only may be a limiting solution.

Is there an alternative to IR35 insurance for contractors?

Firstly in today’s day and age you don’t need to pay to have your IR35 status assessed. There are plenty of free options available, you just need to put ‘IR35 status assessment’ in your search and press enter. If you have an accountant, they usually do this as part of the service at no extra cost.

When you shop for business insurance, you’ll find that you’re usually offered an add-on called ‘business legal expenses’. It is a product designed to respond to a wide range of commercial and tax disputes and that would typically include IR35 enquiries as well. In other words if your chances of success are above 50%, you get legal and professional assistance against IR35 enquiry and other issues. It’s important to remember that a typical business legal expenses cover would not pay compensation or additional tax if you’re found liable.

No one wants to spend hours reading unfriendly insurance wordings but, irrespective of what product you choose in the end, there are two sections you definitely want to review as a minimum: exclusions and claim conditions. All insurance providers should give you easy access to the full wording (not just the cover summary!) before you buy.

How much is ir35 insurance?

The last we looked it started from £99 for the core cover - i.e. legal and accountant expenses only. Some insurance providers offer IR35 assessment at an extra fee of about £30 or more and if you include the tax liability/interest element, your price might go up to £200 or more a year.

It’s not a small cost for an insurance policy that’s protecting you against one risk only. A risk that’s insignificant if your status is outside the IR35. In fact it’s currently very low for contractors and freelancers irrespective of their IR35 status. Therefore is IR35 insurance worth it?

In comparison business legal expenses cover starts from £25 a year and most include tax investigations like IR35. Some providers like Suited offer it at no extra costs with professional indemnity insurance.

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