Contractors don't think taxman is after them

Nearly two thirds of IT contractors believe they are never likely to have a brush with the authorities in their professional lives and therefore do not need any insurance cover, according to a survey by JSA, leading accountants for contractors.

JSA believes that this attitude stems from the fact that many IT contractors lack the mind set of really independent consultants. JSA says that a significant minority of contractors fall into the IR35 net - not to mention other compliance traps - because at heart they still think like employees instead of behaving like truly independent operators and running their affairs in a business-like fashion.

JSA chief executive Barry Roback said: "Try telling a solicitor or accountant that he doesn't require cover for professional indemnity, public liability equipment or legal expenses, and he will think that you must come from another planet. Why should it be any different for a professional contractor?"

A minor brush with the Revenue could set a contractor back £2-3,000 in professional fees, while insurances to cover this eventuality cost from about £100 a year.

Potential risks

Barry Roback said: "Think of the potential risks: You may have to deal with IR35 investigations, tax, PAYE and VAT investigations from HM Revenue and Customs, non-payment by creditors, data protection, employment disputes and civil and criminal proceedings against you.

"Admittedly it would be an unlucky person who copped for more than one of these, but the fact remains that in an increasingly litigious society, and with a zealous HMRC in hot pursuit of potential offenders, every contractor needs cover for potential legal costs. It is not really a case of the innocent need not worry. Merely defending your 'innocent' position can prove to be very costly."

Mr Roback points out that it is easy to get involved quite unwittingly in a potentially expensive dispute. He said: "For example, most contractors are by now familiar with the Arctic Systems case when a husband-and-wife company were successfully attacked by the HMRC under Section 660A of the Taxes Act in order to stop the well-established (and at the time, assumed perfectly legal) practice of transferring shares in family companies to the 'non-working' husband or wife in a family business. This can cost the unwary defendants a substantial sum in legal expenses, never mind payment of back tax and interest."

EBTs

JSA also warned contractors of the dangers of signing up to various 'off the peg' solutions to avoid IR35, including setting up offshore companies and employee benefit trusts (EBTs).

EBTs were originally designed to reward the long-term efforts of employees in a tax-efficient manner. JSA claims that when evidence was accumulated that showed some were being used merely to avoid paying income tax and National Insurance, they were largely attacked by the Chancellor over three years ago.

Nonetheless, a judgement last month in the House of Lords in the case of MacDonald (Her Majesty's Inspector of Taxes) v. Dextra Accessories Limited means that for many companies, the Dextra case will result in a change to the anticipated corporate tax treatment of their EBTs where they still exist.

Mr Roback said: "The Dextra case is a good illustration of the fact that tax avoidance schemes are always vulnerable to attack from the HMRC with the prospect of expensive legal battles. Several contractors have found out to their cost that these 'quick fixes' have exposed them to large tax liabilities, penalties and interest."

He concludes that contractors must take a reality check when assessing their professional insurance needs. "While most contractors will hopefully get through their careers without legal problems, the fact remains that tax laws are constantly being reinterpreted and what may look like a legitimate financial arrangement one day, could land you in trouble the next. Furthermore in an increasingly litigious world, it is vital that contractors have sufficient cover to protect themselves against potential legal action on a wide variety of issues."