Why being insured pays off for the impending IR35 reforms
If you’re a UK limited company contractor, you’ve almost certainly heard of IR35 - but do you know just how much IR35 insurance could protect you?
If you’re a limited company contractor working in the private sector in the UK, then you’ve almost certainly heard of IR35. In fact, you’ll currently be responsible for declaring your IR35 status and will hold the requisite tax liability. This is legislation designed to catch “disguised employees” and ensure they are paying the appropriate level of tax and National Insurance. However, come April 2021, the much talked about IR35 reforms will come into play, which mean that:
- The responsibility of declaring you inside or outside IR35 will sit with your end client and,
- The tax liability will sit with your fee-payer (this could be your end client or a recruiter).
If your end client declares you inside IR35, you will be taxed at source using PAYE, just like an employee. However, unlike an employee you won’t be eligible for perks such as sick pay or annual leave. If you are declared outside IR35, you will continue to be responsible for your own taxes through self-assessment.
These reforms were originally due to come into effect in April 2020 but were postponed by a year as part of the Chancellor’s response to the then-escalating coronavirus pandemic. They are now set for April 2021 and are very unlikely to be postponed again, so it really is time for contractors to make sure that they – and everyone in their contractor supply chain – are fully prepared.
What could be the consequences of losing an IR35 investigation?
As mentioned, you currently hold the tax liability for your current engagements, should HMRC decide you are inside IR35 and owe them money. After the reform is implemented next year, you will continue to be liable for all pre-April 2021 assignments, while your fee-payer will be liable from April 2021 onwards. If you were to be investigated and lost, the result could be a huge tax bill as well as any penalties, not to mention legal costs which can quickly stack up.
Take the case of , for instance. Largely regarded as one of the cornerstone IR35 cases, it was defended by Andy Vessey (Head of Tax at Kingsbridge). The IT contractor behind Jensal Software successfully appealed HMRC’s decision to place him inside IR35 and avoided having to pay a tax bill of £26k. At the time, Vessey said of the case, “HMRC ignored more than sufficient evidence which showed the working arrangements belonged outside IR35,” meaning that the case should never have got to court to begin with.
However, others have not been so lucky. talkSPORT presenter Paul Hawksbee lost his IR35 case having been found to owe a staggering £140k tax bill. TV presenter Eammon Holmes, meanwhile, found himself owing a reported £250k after it was ruled he had acted as a disguised employee when carrying out contracts for broadcaster ITV through his PSC.
As a contractor, you need to ask yourself if you could afford to pay a bill like this should you find yourself on the wrong side of an HMRC investigation. Could it result in the loss of savings, or even bankruptcy? And what would it mean for clients if they were held liable for these costs after April 2021? In real terms, none of the answers to these questions are good, so you need to consider protecting yourself with dedicated IR35 insurance that will cover you financially in the event of an IR35 investigation.
How should you prepare yourself for the IR35 reforms?
Some contractors seem to be of the opinion that because the burden of liability is shifting away from them, they have to do very little in preparation for the legislative reforms. This really isn’t the case though and, if you’re a contractor who hasn’t been preparing so far, now is the time to start – April will be quickly upon us.
If your end client declares you inside IR35, then you will find yourself being taxed more while not getting any of the benefits of being an employee. So, it’s in your interest to make sure your clients are educated on IR35, and that you are indisputably outside the legislation. But how to do that?
- Firstly, take a long hard look at your current contracts, plus any standard contract templates you may use. Check that all of the clauses and wording clearly signal that you’re in business on your own account and not an employee.
- Next, take a critical look at your working practices. Again, does how you engage with you client day to day mark you as a contractor or an employee?
- If there is anything in your contracts or working practices that could leave you open to accusations of being a disguised employee, now is the time to fix it. Speak to your end clients and explain the situation in order to see what you can negotiate. It’s in both your best interests, after all.
- If your end clients and recruiters are a bit blasé regarding IR35, take it upon yourself to educate them. You don’t want them making rushed or blanket decisions so, like you, they need to be making preparations.
- Finally, purchase . You need to do your own research here but look for products that flex to cover whoever holds liability in the contractor supply chain so that you’re all covered no matter what. You should also look at whether or not your IR35 insurance gives you access to independent status reviews as these can really help your end client make informed decisions on your status.
Taking these steps will give you a good grounding so that you and your clients are as prepared for the IR35 reforms as you can be. While all prep is important, only IR35 insurance will protect your contractor supply chain from potential high costs or even bankruptcy should you be unlucky enough to lose an investigation. It will also have the benefit of making you a less risky prospect to end clients and so should help your chances when seeking to win new contracts with clients nervous about using PSCs due to this legislation.
This article was contributed by Kingsbridge Group