Is IR35 insurance worth the paper it's written on?

[WTFH]

In your other recent post, you were talking about IP and IR35. Can you tell us what your actual question/problem is?

[jamesbrown]

Working practices determine IR35 status. The contract merely purports to represent the working practices. Most providers that offer tax loss insurance under Chapter 8 will review the working practices. There are very few providers offering tax loss insurance under Chapter 10 and that focuses on the supply chain and is concerned with a different risk. IR35 is based on a hypothetical contract between you (a natural person) and the end client, which is interpolated from your working practices. So it is entirely possible to have a contract that appears to be outside IR35 while being inside IR35, given your working practices. This is why any decent IR35 "contract" review (or, indeed, SDS) is, in fact, a review of working practices and not merely the contract wording.

The reason this insurance is worthless - by which I mean tax loss insurance and not legal expenses cover, which is absolutely worthwhile - is that tax loss insurance always has a clause about there being a "reasonable prospect of success". If, for example, the end client sides with HMRC about your working practices, there won't be a reasonable prospect of success.

In summary, forget about tax loss insurance and focus on legal expenses cover, which is going to be needed regardless of the outcome and (typically) covers tax investigations more generally, not just IR35.

[northernladuk]

To answer your question you need to have a good understanding or IR35 and have done a lot of research on past cases. You need to understand HMRCs argument. Then you need to know the intricancies of what they are looking for and how working practices affect the argument. There are three main pillars, MoO (lack of), RoS and D&C. Something will make HMRC think they aren't there and then they go looking in to working practices. A fairly good example to look at is the JLJ case. He put himself inside by the way he acted in a long contract. Can't remember the details but one to read in detail. Most of the cases have been documented and commented on by CUK so have a dig around.

There is no such thing as a water tight contract, it depends on the working practices and in HMRC's eyes there is very little watertight about them (bum on seat day rate contractors that is). RoS, for example. The clauses in the contract have been called shams by a sitting judge in a case so it being in the contract isn't always the silver bullet. They ask the client and they say nah, never take a sub and boom. You're done.

The contract can be missing stuff so there is a problem or you can be acting differently to the contract which can be a problem. The insurances all have something about only kicking in with a resonable prospect of success, i.e. contract is checked and you've kept your nose clean. If you've been acting like a perm and haven't been keeping to the contract then they won't pay out. What the limit is between kicking in and not I have no idea.

So it's hard to answer your question. It's not black and white and needs a lot of understanding of both contract and working practices to get a clear picture you'll understand.

[sidestepping]

During my research, I've encountered various insurance policies that purport to cover liabilities, penalties, and even interest owed in the aftermath of an IR35 enquiry. But how is this possible? And is the insurance worth the paper it's written on?

Consider the following scenario: You take the insurance out. You get caught up in an HMRC investigation, and the enquiry concludes that your contract should have been inside; HMRC must, therefore, have evidence that YOU have not acted appropriately. I come to this conclusion because, from my research, the insurer checks each contract and ensures it is outside IR35 compliant. If the contract fails the acid test, then they will require amendments to bring it up to standard, or they simply won't insure you in the first place. One can, therefore, safely assume that the contract will be watertight, and the only thing HMRC could have picked up on was how you acted.

Surely, at this point, the insurance is invalid? The insurer can claim that the liabilities/penalties have arisen due to you not acting appropriately as an outside IR35 contractor and you are responsible. After all, how could the insurer certify you against this? What stops an individual from taking the insurance, not sticking to the contract, and accidentally acting like an employee, knowing there will be no consequence for them? The insurer surely can't be expected to cover this again.

So, is Outside IR35 insurance worth the paper it's written on? Does anyone have experience with this? Does anyone know what the T&Cs say and specifically what exclusions the insurer makes?