IR35 private sector reforms: Zurich Insurance under fire over contractor blanket ban

Zurich Insurance’s decision to blanket-ban the use of limited company contractors in response to the incoming IR35 private sector reforms is raising eyebrows, given the firm’s willingness to insure off-payroll workers against IR35-related investigations by HM Revenue and Customs (HMRC).

Zurich is actively involved in underwriting insurance policies for a handful of contractor recruitment and insurance firms that provide off-payroll workers with financial protection against IR35-related tax investigations.

Its policies typically offer financial cover to limited company contractors that are classified as working outside IR35 should they find themselves the subject of a long and costly investigation by HMRC into their tax affairs.

In many cases, these policies can also be extended to cover other parties that make up the end-client-to-contractor labour supply chain depending on who HMRC decides is liable for any penalties incurred as a result of the contractor being misclassified as working outside the IR35 regulations.

In contrast to the company’s willingness to provide financial backing to outside IR35 contractors, the Switzerland-based insurance giant has joined a host of other firms in the financial services space by introducing a blanket ban on contractors as part of its own IR35 compliance strategy.

The company has declared that it will only engage contractors that provide services via umbrella companies in preparation for the IR35 private sector reforms, which come into force on 6 April 2021.

The company is known to have begun its IR35 preparations 18 months ago, ahead of the original April 2020 start date for the reforms, by using HMRC’s Check Employment Status for Tax (CEST) tool to assess whether its contractors’ engagements fell within the scope of the IR35 rules.

According to Zurich Insurance contractors, who spoke to Computer Weekly on condition of anonymity, these assessments resulted in the “majority” of its off-payroll workers being classified as “inside IR35”. These individuals were then told that if they wanted to continue working for Zurich, they would need to do so via an umbrella company. 

When the government delayed the onset of the reforms by 12 months because of the Covid-19 pandemic, Computer Weekly understands contractors were told they could continue to engage with Zurich through their own limited companies.

However, with the delayed start date for the reforms now fast approaching, Zurich confirmed in a statement to Computer Weekly that it is resuming its request for all contractors to work via umbrella companies from 6 April 2021.

“Our identified contractors will be transitioned over to the new arrangements by 6 April [2021], at the latest,” the company said.

“This is in line with the industry and will ensure we are complying with the HMRC rules. In the lead-up to the changes in April [2021], we’ll be continuing to work with colleagues affected to ensure they are aware of the tools and support available.”

The IR35 reforms will see medium to large private-sector firms assume responsibility for determining how the limited company contractors they engage with should be taxed, as part of a wider clampdown by HMRC against tax avoidance by off-payroll workers.

Currently, it is up to contractors to self-declare whether or not the work they do and how it is performed means they should classified – for tax purposes – as employees of the company (inside IR35), or as off-payroll workers (outside IR35).

In HMRC’s view, this system of self-declaration is open to abuse, as contractors could deliberately seek to misclassify themselves as working outside IR35 to minimise their employment tax liabilities.

This is because an inside-IR35 designation means the contractor is liable to pay the same employment tax and national insurance contributions as a permanent employee of the company.

For this reason, HMRC has ruled that contractors will cede control for determining how they should be taxed to the private sector companies that engage them, but it is a shift in responsibility that some enterprises seem unwilling to take on.

As previously mentioned, many high-profile firms in the financial services industry have sought to side-step the reforms by introducing rules that mean contractors can only continue work for them via a pay-as-you-earn (PAYE) umbrella company.

Signing up to an umbrella company typically requires the contractor to cease trading as a limited company and become the umbrella’s employee. As such, the end-client is no longer required to determine how the contractor should be taxed, because they will already be on the umbrella company’s payroll.

For end-clients, such as Zurich Insurance, this approach enables them to reduce the risk of HMRC querying their approach to complying with the IR35 reforms later down the line. It also means the umbrella company is responsible for ensuring the correct tax deductions are taken from the contractor’s gross pay.

However, Dave Chaplin, CEO of contractor tax compliance specialist IR35 Shield, said it is important for contractors to bear in mind that end-clients cannot “lawfully force the use of an umbrella company on workers” and contractors should be offered a choice between going on the agency payroll or working via an umbrella.

“Zurich is not complying with the new off-payroll legislation – far from it,” he said. “They are side-stepping it and introducing a blanket ban. This will see a hike in their hiring costs and contractors refusing to work with them.”

Meanwhile, the fact that Zurich Insurance is willing to provide cover to outside-IR35 contractors, while taking such a risk-averse approach to complying with the reforms, has not gone unnoticed by the contractor community.

“Zurich Insurance are in the market of insuring firms who hire on an outside-IR35 basis by selling them policies, but they are not prepared to back themselves and are blanket-banning the use of contractors,” said a contractor who spoke to Computer Weekly on condition of anonymity. 

When quizzed on this point, a Zurich spokesperson said the company provides a “whole range of services to organisations to help them manage risk”, adding: “How different businesses apply IR35 status will depend on their circumstances and what works best for them.”

The company is known to underwrite the IR35 protection policies for about half a dozen contractor-focused insurance and recruitment agencies, including Kingsbridge Contractor Insurance.

When asked about its insurance partner’s IR35 compliance strategy, a Kingsbridge spokesperson told Computer Weekly it would be inappropriate for it to pass comment on “Zurich’s internal staffing decisions or requirements” because “how different businesses apply IR35 status and work with contractors will necessarily depend on what works best for them”.

The spokesperson added: “In most instances, however, we believe that a blanket ‘inside IR35’ approach isn’t the most appropriate and there are various tools and products available – such as ours – to help companies navigate the legislation and manage their risk.”

Seb Maley, CEO of rival IR35 insurance provider Qdos Contractor, said Zurich’s stance on IR35 is surprising, given the nature of the business it is in.

“On the one hand, the firm helps protect contractors and businesses from the risks of IR35, but on the other, it seems they are ruling out engaging these workers themselves,” he told Computer Weekly.

“You would hope, like an increasing number of firms, the business would understand that IR35 is manageable with the right approach and there is no need to stop working with contractors due to the reform. It’s another situation that highlights the need for better education and sound advice with regard to IR35.”

Despite the number of firms that seem to be adopting a similarly risk-averse approach to IR35, Maley said it is important to remember that these high-profile examples are not indicative of how the wider private sector is reacting to the shift in responsibility that the reforms are ushering in.

“As concerning as Zurich’s position is for contractors engaged by the business, it’s important to make clear that risk-averse IR35 decisions are not the norm,” he said. “As we close in on 6 April, thousands of firms are readying themselves to compliantly engage contractors outside IR35 going forward.”