Business insurances you may not know you need
Business insurances are one of those things that every contractor knows they need but doesn’t really want to spend too…
All that glitters may not be gold — like this set-up which could catch HMRC’s eye too, warns Kingsbridge’s status expert with 500 successfully defended IR35 cases to his name.
Contractors are a shrewd bunch.
It’s often great to see their entrepreneurial minds in full flow, especially as we approach a more taxing time from April 6th 2025, when the new tax year 2025-26 begins.
An IR35 compliance worry
But on my online travels recently, I spotted a contractor asking for IR35 compliance advice from other contractors, which was slightly worrying given the nature of the query, writes Kingsbridge’s Head of Tax Andy Vessey, who has personally defended more than 500 IR35 cases.
The contractor’s query is below.
And my guidance for that contractor, their agency, and for other agencies and contractors actually, follows.
With IR35; often, all that glitters…
As you’ve probably guessed from my tone, this is NOT an arrangement I would advocate limited company contractors pursuing, no matter how noble growth is an ambition and no matter how golden the opportunity.
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Q: A few years ago, I grew my contractor business to employ four permanent staff, during which time I obtained certain security clearances that my limited company still holds.
Today, on the cusp of 2025-26, those employees have left, and I’m now operating as a one-man band again.
Serendipitous?
But I’m keen to expand again.
And an interesting, lucrative opportunity has arisen that requires the security clearances my business (still) holds. The end-client is interested in engaging both myself and a former employee (one of the four I took on) who previously worked for my limited company.
‘Referral Fee’
The opportunity is inside IR35, but the recruitment agency involved has proposed a structure whereby part of the client’s payment could be allocated as a “Referral Fee” to my limited company.
In addition, a portion of the payment would be for the use of the security clearances held by my contractor business.
‘Reducing the inside IR35 rate’
This payment arrangement for my limited company would be tied to the number of days that we, the labour resources, work, effectively reducing the inside IR35 rate for myself.
I’d appreciate any advice or insights on how best to approach this arrangement, and ensure HMRC compliance with IR35 regulations and tax requirements.
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Here’s my answer as Kingsbridge’s head of tax (who incidentally used to work for the tax authority).
And I hope I’m not too late to offer some guidance!
A referral or finder’s fee is a payment or commission paid to a person who introduces new clients to a business.
Referral fee: impaired authenticity
But the “former employee” is already known, and has been identified by the end-client. This would appear to impair the authenticity of the “Referral Fee.”
Furthermore, I would expect any referral fee to be paid in addition to the contractor’s rate for the work — not erode it (as you say “effectively reducing the inside IR35 rate for myself”).
Security Clearance? It’s not Intellectual Property
I doubt that holding a security clearance for a specific period can be viewed as some type of intellectual property that could be exploited.
A valid security clearance is more of a useful aid to a business or organisation in distinct circumstances.
A potential attempt (in the Revenue’s eyes) to redefine employment income
HMRC may therefore view the agency’s proposal as a transparent attempt to re-define employment income and avoid PAYE tax and Class 1 NIC, although corporation tax would still be payable on any non-employment income. This would then give rise to the possibility of the parties being involved in a tax avoidance arrangement.
Triggering TARR
As the role has been advertised as ‘inside IR35’ the indication is that it falls within the ambit of the Off-Payroll Working (OPW) rules and, as such, there may be scope for the Targeted Anti-Avoidance Rule (TAAR), as prescribed by sections 61WA, Chapter 10, Part 2, ITEPA 2003 to be triggered.
What is HMRC’s Targeted Anti-Avoidance Rules (TAAR)?
The TAAR is intended to discourage avoidance behaviour.
The rule applies when at least one relevant person participates in a relevant avoidance arrangement to secure a tax advantage.
A ‘relevant avoidance arrangement’ is any arrangement where the main purpose, or one of their main purposes, is to secure a tax advantage, by ensuring that at least one of the conditions in section 61O ITEPA 2003 or section 61P ITEPA 2003 is not met.
TARR: meanings of ‘relevant person,’ ‘tax advantage’ and ‘arrangements’
“Relevant person” means either:
- the worker
- a person who is resident in the UK, or
- a person who has a place of business in the UK.
“Tax advantage” includes:
- avoidance or reduction to the charge or assessment of tax or NICs
- repayment or increased repayment of tax or NICs
- avoidance of a possible assessment of tax or NICs, and
- deferral of the payment of tax or NICs, or advancement of the repayment of tax or NICs.
“Arrangements” include any:
- agreement
- understanding
- scheme
- transaction, or
- series of transactions.
TARR and HMRC identification: Are you the highest person in the chain?
Where the TAAR is triggered, HMRC will consider the relevant avoidance arrangement to identify the person who entered into the arrangement, as that person will be liable for the tax.
If more than one person has entered into the arrangement, HMRC will identify the highest person in the chain that is involved in that arrangement, and from whom HMRC considers there is a realistic prospect of recovering the tax and NICs that would be due within a reasonable period (as that person will be liable).
The recruitment agency surprises me
Agencies are usually extremely wary and cautious of the Criminal Finances Act 2017, which is wide-ranging legislation that imposes criminal offences in respect of the criminal facilitation of tax evasion.
It’s therefore surprising to me that the agency in this case has proposed a fee structure that could potentially flirt with this legislation.
‘Interesting’ indeed…
When the contractor posted the question, above, he entitled it “Interesting IR35 query.”
Well, ‘interesting’ is certainly one word to describe the proposed arrangement. Unfortunately for this contractor; the ‘former employee,’ the agency, and the end-client, it is an arrangement that HMRC would likely find ‘interesting’ too.
How Kingsbridge can help
Navigating IR35 legislation and ensuring compliance can be challenging for contractors and businesses alike. Kingsbridge offers tailored support, including expert guidance on IR35 status assessments, compliance strategies, and risk mitigation. Our team is dedicated to helping contractors and businesses understand and adapt to the evolving tax landscape.
Kingsbridge also offers a range of flexible business insurance options to support contractors, including Professional Indemnity, Public Liability, and Employers’ Liability cover, as well as add-ons like Cyber Insurance and Director and Officer’s Liability.
To find out more, get a quote or contact us today.
