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Tax Insurance: To Claim or Not to Claim?

Is Fee Protection Insurance a legitimate deduction?

Many contractors take out Fee Protection Insurance to protect their limited companies primarily in the event of an IR35 enquiry.

Generally, Fee Protection Insurance will react in the event of any type of enquiry, subject to certain exclusions, whether that be IR35, PAYE, corporate, personal or business.

The contractor is provided with peace of mind that should HMRC select them for scrutiny then the fees of their accountant or other nominated professional advisor incurred during the course of the enquiry will be met by the insurer. Tax loss insurance goes that one step further by indemnifying the freelancer against any tax, interest and penalties that may arise at the conclusion of the enquiry, i.e. IR35 and settlements (aka S.660A) enquiries.

It may be enough that this type of insurance enables a freelancer to sleep easy at night but could the premiums qualify for corporation tax relief, i.e. as a revenue deduction in the company accounts, just like many other business insurances?

To be able to claim a business expense for tax purposes the expense must be incurred wholly and exclusively for the purposes of the trade, i.e. incurred for the purposes of earning profits of the trade or profession.

Accountancy fees for the preparation of business accounts and corporation tax returns are allowable expenses but fees incurred in dealing with a tax enquiry are usually disallowable. However, if an enquiry relates specifically to the trading income and as a result of the enquiry no additional profits are brought within the charge to tax, any costs incurred in dealing with that enquiry will be allowed for tax purposes.

HMRC's view on the deductibility of Fee Protection Insurance is contained within their Business Income Manual 46452. It states that additional accountancy expenses incurred because of an enquiry directly related to computing and agreeing the tax liability on trading profits are not allowable if:

  • the enquiry reveals discrepancies and additional liabilities for the year of enquiry, or any earlier year; and
  • those discrepancies, etc., result from negligent or fraudulent conduct.

A premium on a fee protection policy, which entitles the policyholder, amongst other risks covered, to claim for the cost of accountancy/professional fees incurred in negotiating additional tax liabilities resulting from negligent or fraudulent conduct, is not an allowable deduction. As HMRC believe it is impossible to identify a part of the premium that meets the wholly and exclusively test, then not even a proportion of the premiums can be relieved for tax purposes.

Even where the business doesn't make a claim under the policy or only claims expenses that are allowable, the premium still remains disallowable because the premiums cover some risks where the related costs are not allowable for tax purposes.

An IR35 compliance check is not an enquiry that affects the trading profits as it falls under the PAYE umbrella and because of this any claim to deduct the insurance premium is unlikely to succeed. This surely is a minor disappointment when compared to the confidence that Fee Protection Insurance provides a freelancer's business with.

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