IR35 Insurance Explained

What is IR35 Insurance, really?

IR35 insurance is one of those topics contractors often hear about after something has gone wrong.

Usually it comes up when:

• A client asks for proof of cover
• An accountant mentions “risk” in passing
• Or a contractor receives a letter from HMRC and suddenly wishes they’d paid more attention earlier

At its core, IR35 insurance exists for one reason: to cover the professional costs of defending an IR35 enquiry.

Not tax. Not penalties. Not backdated liabilities.

Just the cost of defending your position. And those costs can be substantial.

Why IR35 Insurance Exists at All

IR35 enquiries are not quick checks. They are slow, document-heavy, and often adversarial.

Even when a contractor is confident they are outside IR35, defending that position can involve:

• Specialist tax advisors
• Legal input
• Detailed written responses
• Interviews with HMRC
• Evidence gathering across contracts and clients

The irony is that being right doesn’t make the process cheap.

IR35 insurance exists because:

• HMRC enquiries can last months or years
• Professional defence costs can run into tens of thousands
• Contractors, unlike large organisations, absorb these costs personally

Insurance doesn’t make IR35 go away. It makes defending your position survivable.

What IR35 Insurance Typically Covers

Most IR35 policies focus on enquiry defence.

This usually includes:

• Professional fees for accountants and tax specialists
• Legal costs related to status defence
• Representation during HMRC correspondence and interviews

Some policies also include:

• Cover for contract reviews
• Support during status challenges
• Advice on responding to information requests

The key point is this: IR35 insurance funds expertise, not outcomes.

What IR35 Insurance Does Not Cover

This is where misunderstandings creep in.

IR35 insurance generally does not cover:

• Backdated tax
• National Insurance
• Interest or penalties
• Settlements with HMRC

If an enquiry concludes that tax is owed, the liability still sits with the contractor or their company.

That’s not a flaw in the policy. It reflects how insurance works. Insurers can cover risk, not deliberate or retrospective tax positions.

Why IR35 Insurance Is Linked to Outside-IR35 Status

Contractors sometimes ask why IR35 insurance is associated with outside-IR35 engagements.

The answer is simple: that’s where the risk lives.

Outside IR35:

• The contractor asserts business independence
• HMRC may challenge that assertion
• The contractor bears defence responsibility

Inside IR35:

• Tax is usually deducted at source
• Status is often determined by the client
• Enquiry risk is typically pushed up the supply chain

Insurance follows responsibility. Where contractors carry the risk, insurance becomes relevant.

Client Expectations and “Tick-Box” Insurance

In some sectors, clients request IR35 insurance as part of onboarding.

This can feel bureaucratic, but it reflects a shift in behaviour since the IR35 reforms. Clients want evidence that contractors:

• Take compliance seriously
• Have considered risk
• Can fund a defence if challenged

Importantly, this doesn’t mean clients expect an enquiry. It means they want reassurance that if one happens, it won’t become their problem.

IR35 Insurance vs “Peace of Mind”

Many contractors buy IR35 insurance not because they expect an enquiry, but because they want certainty.

IR35 creates background anxiety:

• “What if HMRC disagrees later?”
• “What if working practices are interpreted differently?”
• “What if the client says one thing and HMRC hears another?”

Insurance doesn’t remove these questions. But it does remove the fear of being financially exposed while answering them.

Common Misconceptions About IR35 Insurance

Let’s clear up a few persistent myths.

“If I have insurance, HMRC won’t investigate”
False. Insurance has no bearing on whether an enquiry starts.

“Insurance means I’m safe if HMRC loses”
Also false. Defence costs are covered, not tax outcomes.

“Only risky contractors need insurance”
Not necessarily. Many low-risk contractors still insure against high-cost events.

“Insurance proves I’m outside IR35”
It doesn’t. It proves you’ve planned for risk.