Insurance Requirements in IR35 Status Determination Statements

Introduction

IR35, formally known as the Intermediaries Legislation, has fundamentally transformed how contractors and freelancers operate within the UK tax system. Since its introduction in 2000, and particularly following the off-payroll working rules expansion in April 2021, IR35 has become a critical consideration for anyone working through a limited company or personal service company (PSC).

However, many contractors and the organisations that engage them overlook a crucial aspect of IR35 compliance: the insurance implications embedded within Status Determination Statements (SDS). Understanding these insurance requirements is not merely a box-ticking exercise—it's essential for protecting your business, managing liability, and ensuring genuine compliance with HMRC expectations.

This comprehensive guide explores the intersection of IR35 and insurance, examining what insurance requirements feature in Status Determination Statements and why they matter for your business continuity and legal standing.

What is IR35 and Status Determination Statements?

Understanding IR35

IR35 legislation exists to prevent tax avoidance by individuals who work in a manner that would typically constitute employment but structure their engagement through a limited company to gain tax advantages. The rules determine whether a contractor should be treated as an employee (inside IR35) or genuinely self-employed (outside IR35) for tax purposes.

The distinction carries significant financial implications. Contractors inside IR35 face employment tax treatment, meaning employers must deduct income tax and National Insurance contributions as if the individual were an employee. Those outside IR35 retain the tax efficiency of self-employment.

The Role of Status Determination Statements

A Status Determination Statement is a formal document that records the IR35 status of a working arrangement. It documents the decision-making process and the factors considered when determining whether a contract falls inside or outside IR35.

From April 2021, the responsibility for determining IR35 status shifted to the client (or the agency, if one is involved) in most cases. This placed a significant burden on organisations to conduct thorough assessments and document their reasoning comprehensively.

Why Insurance Matters in IR35 Assessments

The Connection Between Insurance and Employment Status

Insurance arrangements can serve as a significant indicator of employment status within IR35 assessments. HMRC and tribunals examine insurance provisions because they reveal the true nature of the working relationship.

Key principle: Genuine self-employed contractors typically arrange and pay for their own professional indemnity insurance, public liability insurance, and other business-specific coverage. Employees, conversely, are usually covered under employer-provided insurance schemes.

When an organisation provides comprehensive insurance coverage to a contractor—particularly professional indemnity insurance—it signals an employment-like relationship. This is because the contractor is not bearing the full commercial risk of their work, which is a hallmark of genuine self-employment.

Insurance as Evidence in Tribunal Cases

Several landmark tribunal cases have highlighted the significance of insurance in IR35 determinations. Tribunals have consistently noted that:

• Contractors who arrange their own insurance demonstrate independence and commercial risk-bearing

• Contractors covered under client insurance arrangements show characteristics more aligned with employment

• The absence of appropriate insurance can indicate either a misclassification or inadequate business practices

This means that insurance arrangements are not peripheral to IR35 status—they're central to the evidence base.

Professional Indemnity Insurance and IR35

Why Professional Indemnity Insurance is Critical

Professional Indemnity Insurance (PII) protects contractors and service providers against claims arising from negligence, errors, or omissions in their work. For contractors operating outside IR35, maintaining appropriate PII is both a practical necessity and a strong indicator of genuine self-employment.

Insurance Requirements in Status Determination Statements

When documenting IR35 status, organisations should explicitly address professional indemnity insurance in their SDS:

For contractors outside IR35:

• The SDS should confirm that the contractor is responsible for arranging and funding their own professional indemnity insurance

• Documentation should evidence that the contractor maintains active PII coverage

• The statement should note that the contractor bears the cost and responsibility for this insurance

For contractors inside IR35:

• The SDS should document that the organisation provides professional indemnity coverage or that the contractor is covered under the organisation's insurance arrangements

• This reinforces the employment-like nature of the relationship

Practical Implications

Contractors working outside IR35 must ensure they maintain adequate professional indemnity insurance. Failure to do so creates several problems:

1. Compliance risk: HMRC may view the absence of PII as evidence that the contractor is actually an employee

2. Commercial risk: Without PII, the contractor bears unlimited liability for professional mistakes

3. Client concerns: Sophisticated clients increasingly require evidence of PII before engaging contractors

4. Contractual requirements: Many contracts explicitly require contractors to maintain PII

Coverage Levels and Scope

The appropriate level of professional indemnity insurance depends on the contractor's sector and the nature of their work. For example:

• IT consultants: Typically require £1–6 million in coverage, depending on project scale and client size

• Accountants and bookkeepers: Often need £1–3 million, with higher amounts for larger client portfolios

• Management consultants: May require £2–5 million depending on the scope of advice provided

• Marketing and creative professionals: Coverage ranges from £250,000 to £2 million

The SDS should ideally reference the appropriate coverage level for the contractor's role, demonstrating that the insurance adequately reflects the risks involved.

Public Liability Insurance and Employment Status

The Role of Public Liability Insurance

Public Liability Insurance protects against claims arising from bodily injury or property damage caused to third parties during the course of business operations. While less directly tied to IR35 status than professional indemnity insurance, public liability coverage still carries significance in employment status determinations.

Insurance Indicators in SDS

The Status Determination Statement should address public liability insurance, particularly for contractors in sectors where third-party risk is material:

• Construction trades: Contractors should maintain their own public liability insurance

• Consultants working on client premises: Public liability coverage demonstrates independent contractor status

• Service providers: Those providing services to multiple clients should arrange their own coverage

When an organisation provides public liability insurance to a contractor, it suggests an employment relationship. Conversely, contractors arranging their own public liability insurance demonstrate the independence characteristic of genuine self-employment.

Sector-Specific Considerations

Different sectors have different public liability insurance norms:

• Professional services: Less critical than PII but still relevant

• Trades and manual work: Essential and strongly indicative of self-employment when contractor-arranged

• Consultancy on client sites: Important for demonstrating independence

Employers Liability Insurance and IR35 Status

Understanding Employers Liability Insurance

Employers Liability Insurance is a legal requirement in the UK for organisations with employees. It covers the organisation's liability for employee injuries or illnesses arising from work.

The IR35 Connection

The presence or absence of employers liability insurance can be highly significant in IR35 determinations:

• If the organisation provides employers liability coverage for the contractor: This strongly suggests an employment relationship, as it indicates the contractor is treated as an employee

• If the contractor is excluded from the organisation's employers liability policy: This supports an outside IR35 determination

• If the contractor arranges their own coverage: This demonstrates genuine self-employment

Documentation in Status Determination Statements

The SDS should clearly state:

• Whether the contractor is included in the organisation's employers liability insurance

• If not, what alternative arrangements exist for liability coverage

• The rationale for the insurance arrangement chosen

This clarity is essential for demonstrating that the insurance arrangements reflect the true nature of the relationship.

Cyber Insurance and Modern IR35 Assessments

The Growing Importance of Cyber Insurance

As more work moves online and data protection becomes increasingly critical, cyber insurance has emerged as a relevant factor in IR35 assessments. Contractors handling sensitive data or operating digital systems should maintain appropriate cyber coverage.

Cyber Insurance in Status Determination Statements

Modern SDS documents should address cyber insurance, particularly for:

• IT contractors and developers: Critical for demonstrating independent business operations

• Consultants handling client data: Important for showing appropriate risk management

• Remote workers: Increasingly relevant as cyber threats expand

The arrangement of cyber insurance can indicate genuine self-employment, as it demonstrates the contractor is managing business risks independently.

Insurance Costs and Tax Deductibility

Business Expense Considerations

For contractors outside IR35, insurance premiums are typically deductible business expenses, reducing taxable profit. This creates a financial incentive for contractors to maintain appropriate coverage.

The SDS should acknowledge that contractors outside IR35 bear the cost of insurance, including:

• Professional indemnity insurance premiums

• Public liability insurance costs

• Cyber insurance expenses

• Any other business-specific coverage

Documentation for Tax Purposes

Contractors should maintain clear records of insurance costs, as these are deductible business expenses. The SDS can reference this cost-bearing as evidence of self-employment status.

Contractual Requirements and Insurance Clauses

Insurance Clauses in Engagement Contracts

Most professional service contracts include specific insurance requirements. These clauses typically specify:

• Minimum coverage levels required

• Types of insurance the contractor must maintain

• Proof of insurance that must be provided

• Consequences of failing to maintain adequate coverage

Alignment with IR35 Status

For contractors outside IR35, contractual insurance requirements should align with the contractor's responsibility to arrange their own coverage. The contract should:

• Require the contractor to maintain specified insurance

• Require evidence of coverage (certificates of insurance)

• Make it clear the contractor bears the cost

• Specify that the contractor is responsible for renewals and adequacy

This contractual clarity supports the outside IR35 determination by reinforcing the contractor's independent status.

Common Pitfalls and Compliance Issues

Pitfall 1: Inadequate Insurance Documentation

Many contractors fail to maintain clear evidence of their insurance coverage. The SDS should reference documented proof of insurance, such as:

• Certificates of insurance

• Insurance policy schedules

• Broker confirmation letters

• Payment records

Without this documentation, the insurance arrangement becomes difficult to verify and may not carry weight in compliance assessments.

Pitfall 2: Misaligned Insurance and Status

A common error is claiming outside IR35 status while being covered under the client's insurance arrangements. This inconsistency creates compliance risk and may trigger HMRC challenges.

Pitfall 3: Insufficient Coverage Levels

Contractors sometimes maintain insurance with inadequate coverage limits. If a claim exceeds the policy limit, the contractor faces unlimited liability—a risk that should be reflected in the SDS.

Pitfall 4: Overlooking Sector-Specific Requirements

Different sectors have different insurance norms. Failing to maintain industry-standard coverage can undermine claims of genuine self-employment.

Best Practices for Insurance in Status Determination Statements

Comprehensive Documentation

The SDS should include:

1. Clear insurance responsibility statement: Explicitly state who arranges and pays for each type of insurance

2. Coverage details: Specify types of insurance, coverage levels, and policy periods

3. Evidence references: Note where proof of insurance can be found

4. Renewal arrangements: Document how insurance will be maintained and renewed

5. Risk assessment: Explain why the specified insurance levels are appropriate for the role

Regular Review and Updates

Insurance arrangements should be reviewed annually and the SDS updated accordingly. This demonstrates ongoing compliance and that insurance arrangements remain appropriate.

Alignment with Contract Terms

Ensure that contractual insurance requirements align with the SDS insurance statement. Inconsistencies create compliance risk.

Sector-Specific Tailoring

Tailor insurance requirements to sector norms. Generic insurance statements that don't reflect industry practice may be challenged.

The Future of Insurance and IR35

Evolving HMRC Guidance

HMRC continues to refine its guidance on IR35 status determination. Insurance arrangements remain a key focus area, and organisations should stay informed of developments.

Tribunal Trends

Recent tribunal cases continue to emphasise the importance of insurance in employment status determinations. Organisations should monitor case law to ensure their SDS documentation reflects current judicial thinking.

Sector-Specific Developments

Different sectors are developing more sophisticated insurance requirements. Contractors and organisations should stay abreast of industry-specific developments.

Conclusion

Insurance requirements in IR35 Status Determination Statements represent far more than a compliance formality. They are central to demonstrating the true nature of working relationships and to protecting both contractors and organisations from tax and commercial risk.

For contractors operating outside IR35, maintaining appropriate professional indemnity insurance, public liability coverage, and other business-specific insurance is essential. It protects against commercial risk, demonstrates genuine self-employment, and provides evidence of compliance with HMRC expectations.

For organisations engaging contractors, clearly documenting insurance arrangements in the SDS demonstrates thorough status determination and reduces the risk of HMRC challenge.

By treating insurance as an integral part of IR35 status determination—rather than a peripheral consideration—contractors and organisations can build robust compliance frameworks that withstand scrutiny and protect their business interests.

The key is ensuring that insurance arrangements genuinely reflect the nature of the working relationship, are properly documented, and are maintained consistently throughout the engagement. When these elements align, insurance becomes powerful evidence of appropriate IR35 classification and genuine business practice.