Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Newth Talks Tax - Professional expenses insurance

by
22nd Oct 2007
Save content
Have you found this content useful? Use the button above to save it to your profile.

Professional expenses insurance

This item is not written in response to a particular query, but is a general comment on an interesting situation.

Many professional firms have now arranged professional expenses insurance for their clients in the event of a tax enquiry or investigation. In some instances the insured person is the client, but in other instances the firm itself is the insured party, and takes out insurance to cover all or a block of clients.

Is the insurance premium paid a tax allowable deduction? This question has vexed accountancy practitioners for some time. There is some evidence that amounts paid have been allowed ’without prejudice’ in clients’ accounts in the past. Other commentators, including the writer, have stated that these insurance premiums are not tax allowable.

HMRC have commented specifically on this issue in the Business Income Manual at BIM46452. The revenue view is that PEI premiums are only allowable if the costs incurred in an enquiry or investigation would themselves have been tax allowable. Some professionals had previously relied on the decision in McKnight v Sheppard, but the revenue has dismissed this proposition. Nevertheless this issue (to the writer’s knowledge) has not yet been taken before the Commissioners and courts.

The current revenue view in BIM46452 cannot really be challenged in cases where individual clients take out their own professional expenses insurance policies – that is until someone takes a case to the Commissioners.

However, it is submitted that a completely different situation applies when the accountancy firm is the insured party. This concept has been the subject of discussion with Tudor Davies of Copperfields, who are a long standing provider of PEI. Because of stringent FSA regulations the accountant may well decide to take out a block insurance for all or a selection of clients. The insurance premium is paid by the accountant, and the client is not charged for insurance, but for a ‘service’. Claims on the policy go through the accountant’s books, and it is understood that the accountant obtains tax relief on the block premium. Conversely, any insurance claim proceeds are taxable in the accountant’s hands.

As far as the individual client is concerned, they will be charged for a service, which may or may not be separately identified in the fee note received from the accountant. HMRC have agreed, at a high level, that this a VATable service subject to VAT at the standard rate.

Copperfields confirm that, as far as direct taxation is concerned, payments made by clients for the ‘service’ in connection with professional expenses in the event of an enquiry or investigation have either been allowed ‘without prejudice’ for income tax purposes, or HMRC have made no comment on the claims made. This issue may well have been encountered by other insurance providers and this story will continue to run.

Newth Talks Tax Archive

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.