What is IR35 Insurance and is it Worth It?
Officially named the off-payroll working rules, IR35 assesses whether a contractor is genuinely self-employed or, in essence, a 'disguised employee'.
Introduced in 2000, this UK-specific rule was created to close the tax loophole where contractors could work like regular employees but receive pay through an intermediary, such as a Personal Service Company (PSC), thereby potentially paying less tax.
The UK government crafted IR35 to ensure that workers, who would have been regular employees if they were directly providing their services to the client, would pay comparable Income Tax and National Insurance contributions as employees.
For creative freelancers, understanding IR35 can be crucial. Whether you’re a videographer, designer, or freelance writer, the UK government’s IR35 legislation could have a significant impact on how you are taxed and, ultimately, on your income.
As a creative professional working on multiple projects for different clients, it’s important to protect yourself from unexpected tax liabilities. One way to do this is through IR35 insurance, which can offer peace of mind and financial protection if you are ever subject to an IR35 investigation by HMRC.
Who does IR35 affect?
You might fall under the off-payroll working rules if:
- You're a worker providing services to a client through an intermediary.
- You're a client receiving services from a worker via an intermediary.
- You're an agency offering workers' services through an intermediary.
Usually, the intermediary is the worker’s own Personal Services Company (PSC), through which the client contracts are made.
If HMRC decides you are ‘inside’ IR35, you’ll be treated as an employee, meaning you’ll pay income tax and National Insurance contributions as if you were on payroll.
For creative freelancers, this distinction is vital. You may work for various clients, delivering short-term projects, but if HMRC determines that your working arrangement is more like that of an employee, you could be hit with additional tax liabilities. Understanding where you fall within IR35 and protecting yourself accordingly can therefore be very important for some freelancers.
What is IR35 Insurance?
IR35 insurance acts as a protective shield against the potential financial and emotional strain an IR35 enquiry can generate. It's primarily designed to safeguard limited company contractors from substantial costs that can arise from an IR35 investigation, which could encompass defence costs, taxes, penalties, and interest payable to HMRC.
Some key features of IR35 insurance include:
- Cover for taxes, interest, and penalties arising from IR35 investigations
- Coverage for tax, PAYE, NIC investigations, and more
- Support from tax experts, including former tax inspectors, during IR35 enquiries
- In certain covers, payment of your IR35 liabilities, penalties, and interest
If you’re a creative freelancer - say, a graphic designer or a photographer - and you’re under investigation by HMRC, your IR35 insurance could step in to cover your defence costs and any potential tax liabilities. Here’s a step-by-step breakdown of how it works:
- Investigation Initiation - HMRC opens an IR35 investigation into your contracts.
- Legal Defence - Your insurance can cover the cost of legal representation to argue your case that you fall outside IR35.
- Tax Liabilities - If you’re found inside IR35, your policy could cover the tax owed, along with any penalties or interest.
- Settlement or Closure - Once the investigation concludes, your insurance can ensure you’re not left with an unmanageable financial burden.
Freelancers in the creative sectors often face unique IR35 challenges. Unlike traditional contractors, their projects can vary significantly in scope - making it harder to determine whether they fall inside or outside IR35.
For example, they might work for several clients on short-term contracts, but if HMRC believes they're working in a way that mimics an employee relationship, you could be deemed inside IR35.
For example, if a freelance filmmaker works with a production company on multiple consecutive projects, HMRC might question whether they're genuinely independent.
Is IR35 Insurance Worth It?
Dealing with IR35 and its associated risks can be a significant hurdle for contractors, recruiters or end clients engaged with contractors. As the HMRC compliance checks intensify, it's crucial to acknowledge that no business is entirely safe from the gaze of tax authorities.
In recent years, even high-profile individuals have faced significant tax bills due to IR35 disputes. It's not just about the elite; several businesses, from contractors to end clients, find themselves under the scrutiny of HMRC for compliance.
Here's why IR35 insurance might be a wise investment:
- IR35 enquiries can be complex, so the right insurance not only provides financial security but also grants you access to expert representation to help navigate through the intricate process.
- Tax and IR35 liabilities can be expensive, so IR35 insurance means you're financially secured against unexpected costs and any resulting tax liabilities.
- Knowing you are protected offers peace of mind, especially when HMRC compliance checks are ramping up.
- IR35 insurance can cover retrospective tax years. HMRC can probe into accounts from up to 4 to 6 years back, depending on the circumstances.
IR35 is an intricate subject and its implications can be substantial. As the dynamics of contracting and freelance work evolve, and as tax laws become more complex, having IR35 insurance in place might be less of a luxury and more of a necessity.
Whether you're a contractor, a recruiter or an end client, it's prudent to evaluate the potential risks and decide if IR35 insurance is the right fit for your unique circumstances.
It's also worth bearing in mind that IR35 insurance doesn’t just cover legal costs - it provides added benefits that can be a lifeline for freelancers. These include:
- Access to legal advice - Many policies offer ongoing access to specialists who can review your contracts and help you determine whether you’re likely to fall inside or outside IR35.
- Contract assessment tools - Some policies include access to tools or experts who can help you assess whether your contracts are compliant with IR35 rules.
- Tailored legal support - When working in the creative industries, it’s essential to have legal professionals who understand the nuances of your work and can defend your case effectively.
Any views or opinions expressed above are for guidance only and are expressed in generic terms. They are not intended as a substitute for readers taking appropriate professional advice relevant to individual circumstances.
Written by
Luke Glassford
Marketing Director
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