Tax insurance is a relatively new insurance to come on the market and is one that is aimed specifically at contractors and freelancers who are worried they might fall within the IR35 regulations but do not have the time or energy to look at the accounting options to prevent this from happening. Instead they feel that it is better to invest in a policy that will cover them against the worst case scenario – a HMRC investigation – and protect them if they become involved in a VAT or IR35 related dispute.
This new tax investigation cover (often known as IR35 insurance) is a worthwhile investment if a contractor hasn’t set up an IR35 – proof status for their company and if they are not completely sure whether they would qualify or not. However it is worth noting that the PCG (Professional Contractors Group) estimate that there are about 1.5 million contractors operating in the UK and HMRC only have the resources to carry about a few thousand IR35 investigations each year. So a contractor needs to ask themselves if they are feeling lucky? If not, they might want to cover themselves against HMRC knocking at their door. Because once an investigation does start it can feel like they are being persecuted and that HMRC is out to get them. It can also be extremely time consuming and costly to defend these cases and proving their innocence, running into thousands and thousands of pounds.
However, it is important to check what such insurance covers. The most basic of policies will all provide professional help when it comes to an investigation by HMRC. However, the better options are those policies that allow the use of the accountant that the contractor normally uses. This is far preferable to using the insurer’s favored accountant which can cause more complications as they will not be familiar with the history of the case or of the business accounts. Also, it is important to check that a policy covers all phases of the HMRC investigation, including any potential appeals and not just the initial investigation only.
Better still is to invest in an insurance policy that will check the contractor’s IR35 status from the beginning by going through their PAYE and their working practices and adjudging whether they consider that contractor to be a ‘disguised employee’. If they are happy with everything they see they will then guarantee that if HMRC come knocking they will handle it.
Finally, it is worth looking at policies that provide comprehensive tax cover, including not just IR35 but also other HMRC investigations including income tax and National Insurance liabilities and covering back dated tax issues. These policies all come at a price and once again it is worth the contractor asking themselves if it is good value for them to buy that peace of mind. Currently the price varies anywhere from £100 to £1000 depending on how much cover is needed. Another option is to invest in membership of the PCG which offers tax investigation as a standard benefit of membership.[/vc_column_text][/vc_column][/vc_row]