IR35 insurance – Reducing risk
Since the introduction of the IR35 reforms to the private sector in April this year, one of the main topics of conversation amongst engagers has been risk. In particular, the risk posed to engagers by assessing their contractors as being outside of IR35.
In the period leading up to and post the Off-payroll working legislation introduction, many engagers took an ultra-cautious approach and opted to assess contractors as inside IR35. In some cases, they were even implementing policies ruling out personal service company (PSC) contractors altogether.
While these approaches have either significantly reduced or even removed any risk posed by the Off-payroll legislation, have engagers got it right, and can IR35 insurance policies play a part in reducing the risk of engaging contractors outside IR35?
Engagers risk-averse to new IR35 responsibilities
The main impact of the IR35 reforms was to shift the responsibility for IR35 determinations from contractor to engager (unless the engager qualified as a small business). Failure to make a determination, or take reasonable care in making a determination, would leave the engager liable for any subsequent incorrect or unpaid taxes.
As a result, many engagers responded with inside IR35 blanket determinations for all PSC contractors.
Whilst these actions removed some of the immediate responsibility and risk of the Off-payroll legislation, an element of risk remained. Blanket statements directly contravened HMRC’s reasonable care requirements and represented a significant risk for those engagers that followed this route.
IR35 Insurance – risk versus reward
Our recent article, The IR35 divide, highlighted the conflict between risk-averse legal and taxation representatives and under pressure recruiters and managers who need specialised skills and talent.
The loss of specialised and high-calibre contractors due to “inside IR35” determinations or blanket statements was repeatedly raised as a threat to engagers looking to circumnavigate the IR35 reforms.
Therefore, we raised the question of whether accepting some IR35 risk with IR35 insurance backing would be outweighed by the reward of the business gained in doing so?
IR35 Compliance and insurance
Evidence is already giving us examples of skilled contractors migrating to “outside IR35” assignments. For those engagers that made inside IR35 blanket statements, this migration is causing huge issues concerning skills gaps, workload capacity and project consistency. In some cases, engagers have already fallen behind on project timescales and risk incurring delivery penalties or stoppage fines.
With the economy showing signs of recovery and public investment increasing, the need for skilled and motivated contractors is also likely to increase. However, contractor availability has become a significant and immediate issue for engagers that took a risk-averse approach.
So can IR35 insurance make a difference? The answer depends on whether engagers are prepared to overcome their fear of risk.
A robust compliance process underpinned with a comprehensive insurance policy could eradicate almost all of the engager’s risk. Engagers with a robust due diligence process and some qualified, professional support should have little trouble identifying a supply chain and process that includes an insurance provision.
IR35 insurance policies provided on the strength of the compliance process will usually include First and Upper-tier tax tribunal representation, cover for previous tax years for up to six years, and cover all defence costs, including liabilities and penalties.
Engaging with fee payers (agencies) with insurance protection should leave engagers with very little to fear from HMRC’s transfer of debt provisions and everything to gain from a talented contractor workforce keen to provide their services.
Our Founder and Director of Workr Compliance, Andrew Webster, recently hosted a webinar with Markel Tax on IR35 insurance. For a complimentary recording of the webinar, please click here.
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