Various high profile businesses offer IR35 tax and expenses insurance as a way of offsetting risk against an IR35 claim. Historically the party able to take up the insurance was the contractor who would be liable but since the onset of the public sector rules, the liable party is the fee payer, namely the hirer or agency (if one is involved) that pays the contractor company.
Ravi Murphy, a director of the recruitment and employment law specialist Lawspeed explains. “Now that the IR35 public sector rules are being extended to the private sector in April next year, it is important that businesses understand how the insurance works if they plan to rely on it.” A common solution to the IR35 issue now being proposed by providers is to undertake a contract review, and if successful, namely indicating that the arrangement is not caught by the new rules, the hirer or agency can rely on the result because it is underwritten by IR35 insurance. Some claim that the insurance will not only cover the expenses involved in fighting an HMRC claim, but that it will also cover unpaid levels of PAYE and NICs. This would be a very attractive and simple proposition were it reliable, but there are key factors to look out for.
- Does the insurance cover anything more than the expenses of fighting a claim? If it does not expressly include payment of PAYE and NICs claimed by HMRC under the new rules, as claimed by some providers, it will not provide that cover.
- Does the insurance cover the new rules or even rules under Chapter 10 (the public sector rules)? Most insurances cover claims under Chapter 8 ITEPA, which are the old rules not the new.
- Who is covered by the insurance? If it covers the contractor only, the cover will not benefit the fee payer that is liable under the new rules. If it covers the activity of a third party only, for example the provider undertaking a contract review, the insurance will not benefit the fee payer. In this last case the only way the fee payer could recover monies would be to sue the third party for negligence or breach of contract. This is a long, drawn out and expensive process that most would want to avoid, with likely low prospects of success.
- How long does the cover subsist for? Most insurances rely on payment of an annual premium, with the cover applicable only for a claim made during the annual period. As risk under the new rules applies wherever payment is made gross to a contractor and HMRC can make a claim for up to 6 years, cover will no longer apply unless premium payments are made for the whole period of risk or until HMRC makes its claim if sooner.
- Is agreement to cover, subject to a ‘prospects of success’ clause? If so, it could mean that if the insurers consider that the defence of the claim has little or no merit the cover could be declined.
Murphy, who previously worked for a Lloyds Syndicate before joining Lawspeed in 2000, concluded “The only way to assess the value of the cover is to review the policy itself, to check who has the benefit and what parts of the policy apply. This is not everyone’s cup of tea and we at Lawspeed specialise in this area. Via our partnership with the trade association ARC a free Lawspeed IR35 insurance check is available for any business so that agencies and hirers can be certain of what they are being offered. All that is required is for a copy of the proposed insurance policy to be sent to us and we will provide advice on the extent of cover promptly.”
For more information or to discuss insurance you are offered call the Lawspeed insurance hotline on 01273 236236. To have a policy checked simply email email@example.com with a copy of the information you have been provided with.