IR35 insurance – Who needs it?
HMRC has issued its latest update on the IR35 Off Payroll Private Sector Reforms, all but confirming that the reforms will come into effect on the 6th April 2021.
HMRC has confirmed what it describes as a soft landing for affected parties for the first 12 months following implementation, emphasising compliance and support. In essence, this means that HMRC will take a lenient approach with parties where they believe mistakes made during the process are genuine.
Whilst this represents an olive branch from HMRC to assist with the impact of the IR35 private sector reforms, many large scale engagers, in the financial sector, for example, have still adopted an ultra-cautious approach and made policy statements ruling out the use of personal service companies.
So how can insurance play a part in changing this thought process?
Risk-averse to new responsibilities
With the reforms shifting responsibility for IR35 determinations from contractor to engager, many engagers have taken an ultra-cautious approach in response.
Even though the immediate financial liability will sit with the fee payer (possibly the engager but more likely the agency), the reforms clearly state that the engager retains responsibility for taking reasonable care in how they handle the process. Failure to do so could still land liability square at the engagers door.
This stipulation and responsibility seem to have been a step too far for some engagers. Ironically, this is even the case for some of the financial service organisations that provide insurance policies for off-payroll workers against IR35-related investigations.
Compliance and insurance
The challenge for engagers is how this approach will affect their capability to attract and retain the flexible talent they have utilised and relied upon previously.
The consensus suggests that contractors will seek assignments deemed outside of IR35, either with small businesses where the reforms do not apply or medium to large businesses with a fair and reasonable determination process.
The alternative, if a PAYE solution is the only choice, is a significant hike in rates and cost to the engager. Neither of which would seem very appealing propositions due to the potential cost of business lost or reduction in profits.
However, a robust compliance process underpinned with a comprehensive insurance policy could eradicate almost all of the engager’s risk. Indeed, 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.
Engaging with fee payers 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.
IR35 insurance policies can be hard to come by, such is the ambiguity surrounding the legislation. In fact, some insurers are even reluctant to provide cover where the government’s own CEST tool is used to conduct determinations.
Policies will therefore fall into one of two categories. One will be policies that contain weak prospect of success clauses that effectively provide underwriters with an opt-out if they deem the case weak. Engagers should avoid these policies wherever possible.
The others will be policies provided on the strength of the compliance process and 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.
All of which should give engagers confidence and peace of mind that the risk of engaging contractors outside of IR35 is mitigated.
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 follow the link – https://workrgroup.com/demystifying-off-payroll-working-for-the-entire-contractual-chain-whilst-protecting-your-interests/
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