A simple guide to tax liability insurance for clients and recruitment agencies looking to insure their IR35 tax exposure under the off-payroll working rules
From 6th April 2021, UK businesses who engage personal service companies (PSCs) may become liable for the tax and national insurance contributions (NIC) of their PSC workers, depending on where they sit in the contractual chain, and their assessment of the worker’s status under the IR35 legislation.
This exposure to a potentially extraordinary tax liability has led many businesses to seek tax liability insurance, specifically IR35 insurance, to manage this financial risk they now face.
IR35 insurance provides indemnity for the insured against the representation costs in defending IR35 compliance activity from HMRC, as well as the tax/NIC liabilities, penalties, and interest found to be owed as a result of such activity.
Insuring against tax liability can be a complex prospect. Qdos pioneered IR35 insurance 20 years ago for contractors and again for engagers, faced with these new responsibilities, with the Off-Payroll Tax Liability Cover (TLC).
This guide is designed to provide an overview of a few key concerns, questions, and pitfalls that should be considered when arranging cover for your tax exposure under the off-payroll working rules.
- Prospects of Success
Policies that cover the cost of defending legal and/or tax disputes typically contain a condition referred to as ‘prospects of success’. In short, these clauses are designed to allow the insurer to decline cover where a policyholder wishes to pursue a claim that is unlikely to succeed. For obvious reasons, such insurance policies are not designed to facilitate frivolous claims nor pursue lost causes.
Where a policy is covering both defence costs and tax liabilities, it is important to understand whether a Prospects of Success condition applies to both elements of cover. The Qdos Off-Payroll TLC includes a Prospects of Success condition which only applies to defence costs.
This means that in the unlikely event that an otherwise valid claim under a Qdos Off-Payroll TLC policy is deemed to not have sufficient prospects of success, Qdos shall cover the cost of settling the dispute, and indemnify the policyholder for the applicable tax and NIC incurred as a result of conceding to HMRC, rather than continuing to fund the defence.
- Claims-Made Cover and Notification Periods
Tax liability insurance operates on a ‘claims made’ basis. This means that the policy must be in place at the point a notifiable event occurs – specifically in this case, when HMRC launch an enquiry.
This means that a standard annual ‘claims made’ policy purchased on 1st January 2021 will not provide any protection for an HMRC enquiry launched in 2022 or beyond, unless it has been renewed or run-off cover arranged. The nature of HMRC enquiries is that they will be retrospective i.e. they will relate to historic periods. If you wish to remain protected, you are obligated to renew the insurance for the full period of time HMRC are able to investigate – in some cases, up to 6 years.
This obligation to renew creates an unknown cost for the policyholder – insurers are free to apply higher premiums for renewal or run-off. They may even choose to cease offering cover altogether, leaving the policyholder uninsured.
Qdos recognise that this creates an entirely unreasonable degree of uncertainty for businesses that engage contractors in volume and will incur an aggregated exposure over the coming years.
To address this shortcoming, Qdos have a market-leading 6-year notification period built into our Off-Payroll TLC policies. Once you have taken out cover for any given year, that year is automatically insured for a further six years at no additional cost.
Prior to arranging your IR35 insurance, it is important to take the time to understand what obligations you may have to renew or otherwise maintain your cover.
- Insurable Interest
Following the incoming reform to IR35 from April 2021, several parties may result in an exposure to tax liability following HMRC enquiry. Most providers of this type of tax liability insurance have made the necessary changes to policies to ensure that all parties in the contract chain are insured, however this can create some logistical challenges in terms of identifying how the policy should be arranged.
Insurable interest is a concept that underpins all contracts of insurance and dictates that only a person/business who would suffer a loss can insure against it.
The reform will mean that individual contractors will no longer have an insurable interest in their IR35 status (unless the small business exemption is applicable). On this basis, any policies that are held by individual contractors and/or policies where premium is paid by the individual contractors, for the purposes of covering the contract chain under the off-payroll rules, may not be enforceable.
To avoid this issue, the Qdos Off-Payroll TLC policy is specifically issued to the fee-payer (the entity which directly makes payment to the PSC) or end hirer – covering all parties who have insurable interest.
Furthermore, the Off-Payroll TLC policy is provided free of charge with all ‘outside IR35’ status assessments carried out via the Qdos Status Review facility, meaning that no premium is paid by any party without insurable interest.
Prior to arranging cover, it is strongly recommended that you ensure no premium is being paid by individual contractors who have no insurable interest in the cover provided.
Having provided insurance to businesses and self-employed workers with tax exposures for over 20 years, Qdos are uniquely positioned to offer advice and support in respect of both the IR35 legislation, and the options for insuring against tax liability. Get in touch with our team of experts via firstname.lastname@example.org or call us on 0116 478 3390.
Qdos are leading IR35 experts with over two decades’ experience in defending cases. We have supported over 2,200 end clients and the agencies which place them to fairly and compliantly assess the IR35 status of their PSC workers, whilst confidently insuring the results, via our award-winning Qdos Status Review service.