IR35 is the shorthand for the off-payroll working rules that determine whether a contractor supplying services through an intermediary (typically a personal service company) is, for tax purposes, closer to an employee of the end client than a genuine business supplier. The rules now sit in Chapter 10 of the Income Tax (Earnings and Pensions) Act 2003, with Chapter 8 continuing to apply where the end client is a small business. From April 2021 the reforms moved the status-determination burden onto medium and large end clients in the private sector, mirroring the public-sector position from April 2017. Professional indemnity cover sits within this landscape because insurance is one of the recognised in-business indicators HMRC and the courts consider.
The foundational status test still traces back to Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497, which set out the three limbs of control, mutuality of obligation and personal service, with all other contractual terms consistent with a contract of service. That framework has been refined more recently in cases such as HMRC v Atholl House Productions [2022] EWCA Civ 501 and Kickabout Productions v HMRC [2022] EWCA Civ 502, both of which emphasise that status is a multi-factorial judgment on the hypothetical contract between the worker and the end client.
HMRC’s Check Employment Status for Tax (CEST) tool asks about the same factors, and one section deals specifically with being ‘in business on your own account’. The indicators HMRC and tribunals typically weigh here include:
Holding professional indemnity cover in the contractor’s own name does not by itself put an engagement outside IR35. It does, however, evidence that the contractor bears the financial risk of a claim and is trading as a business rather than as an integrated member of the client’s workforce. Insurance is not decisive, but its absence is often noted by HMRC as consistent with employment.
Where the end client (or, in Chapter 8 cases, the intermediary itself) revises a status determination, the tax consequences are dealt with separately from the underlying professional liability. The PI policy responds to third-party claims of negligent advice or services — not to HMRC assessments. A status change does not retrospectively remove cover for work already performed under the policy, though contractors moving onto an umbrella-company payroll should check whether the umbrella’s policy covers their prior limited-company activity. In many cases it does not, and standalone run-off cover is the mechanism that protects the contractor for claims notified after the limited company ceases trading.
PI is written on a claims-made basis, meaning the policy in force when a claim is notified is the one that responds, not the policy that was in force when the work was done. Contractors between engagements should keep cover in place, and contractors closing a personal service company should consider run-off cover for the period during which a claim could still surface. The relevant limitation periods under the Limitation Act 1980 are six years for contract claims and, in negligence, potentially longer under section 14A where the damage is latent.
End clients and recruitment agencies commonly require the contractor’s limited company to hold PI at a set limit — often £1 million or £2 million each and every claim. Read the schedule carefully: some contracts specify aggregate limits, some require named-insured status for the end client, and some require notification of policy changes. Umbrella-company workers may find that the umbrella’s master policy covers only work carried out under that umbrella, leaving earlier or parallel limited-company engagements uninsured.
The IT professionals’ PI insurance guide covers the technology-specific exposures that sit alongside the tax status question. Contractors advising in regulated sectors may also want the management consultants’ PI insurance guide for parallel considerations. Apex Insurance Brokers arranges PI cover for IT contractors trading through personal service companies and for consultants trading as sole traders or partnerships, and can talk through run-off, contract-chain requirements and indicative limits based on the work described.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.