insurance: IR35 Insurance

IR35 is the informal reference to the legislation introduced on 6th April 2000 to prevent people from disguising their employment status.

The legislation means that the HMRC can tax some contractors as though they are employees of their clients. Contractors caught by IR35 pay significantly more tax reducing their take home pay by up to 25%.a

The IR35 tax rules were deasigned to prevent tax avoidance by workers using personal service companies, composite companies and partnerships - these have all come to be known as "intermediaries". Workers had been using intermediaries to reduce their tax and NIC liabilities when really they should have been paying tax as if directly employed.

The new tax rules said that, if an intermediary was being used 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 HMRC have employed an army of inspectors to reclaim tax under this new regime & over one hundred thousand investigations are carried out each year.

In order to offset the financial impact of an IR35 investigation, IR35 insurance is a necessity. Investigations can be stressful, tiring and expensive...especially if you are found liable to pay several years backdated income tax and national insurance contributions. This can be catastrophic, especially for a small business. As the investigation kicks off accountants fee's often run into many thousands of pounds. Small wonder that prudent contractors guard against these knock out risks.

IR35 insurance coverage comes in two forms - preliminary cover for representation costs in case of an enquiry / compliance visit / tax investigation. The second variety is more expensive, but covers the costs of a full-fledged investigation and any tax liabilities owed to the HMRC - well worth the extra money spent.

Freelancers are now frequent targets for random tax inspections and investigations. No matter how carefully and professionally your tax returns have been prepared and filed, in case of a tax dispute your business could inadvertently hog the spotlight for all the wrong reasons. So apply for IR35 Insurance cover today and keep your business working through the delirium of taxation legislation.