A business has started paying fee protection insurance. The business has taken out the cover directly with the insurance company. Will it be allowable for tax?

Unfortunately, no tax relief is due for such insurance premiums.

Business-related insurance premiums are generally allowable on general principles following the wholly and exclusively rule. This rule in s 54 CTA 2009 for corporation tax and s 34 ITTOIA 2005 for income tax states that there can be no deduction for expenses not incurred wholly and exclusively for the purposes of the trade. The legislation adds that where an expense is incurred for more than one purpose then a deduction is possible for an identifiable part or a proportion which is incurred wholly and exclusively for the purposes of the trade. The HMRC manual at BIM37007 elaborates on this and provides some useful background narrative on the issues involved. It points out that:

“Not everything charged in the profit and loss account of a trade, profession or vocation is an allowable deduction for tax purposes.”

There is a distinction between accountancy costs for drawing up accounts for business reasons and tax reasons; one is incurred in the course of a business and the other is not. In practice HMRC treat accountancy costs relating to tax compliance as an allowable deduction. HMRC Statement of Practice SP16/91 states that:

“Additional expenses arising out of an investigation … will not be allowed where the investigation reveals discrepancies and additional liabilities for earlier years, or a settlement involving only one year includes interest or interest and penalties. Where, however, the investigation results in no addition to profits, or an adjustment to profits for the year of review only without a charge to interest or interest and penalties, the additional accountancy expenses will normally be allowed.”

HMRC Tax Bulletin 65, June 2003 deals with fee protection insurance and applies the wholly and exclusively rule noted above in the context of whether or not fee protection policies and insurance are allowable deductions against profits. It states that:

“In relation to fee protection insurance, premiums paid to insure against the risk of incurring additional costs are allowable for tax purposes only if those additional costs would themselves have been allowable. This includes the requirement that those costs would, if incurred directly by the business, satisfy the test that they are incurred wholly and exclusively for the purposes of the business.”

The Bulletin then elaborates that where the risks covered include the cost of accountancy fees incurred in negotiating additional tax liabilities resulting from negligent or fraudulent conduct then the whole of the costs are not an allowable deduction. Without being able to identify a component incurred wholly and exclusively for the purposes of the trade then an apportionment is not possible. Taxpayers who either make no claim or who only claim for expenses allowable under SP16/91 still cannot claim a deduction for the insurance costs because the premiums cover some unallowable risks.

This view is bolstered by the case of Smith’s Potato Estates Ltd v Bolland 30 TC 267 which is analysed and discussed in BIM37850. Where insurance covers risks that are not solely incurred for a trade purpose the wholly and exclusively test is breached and so the costs of the insurance should be disallowed for tax purposes.

Note that the situation would be different if the tax agent were the insured party. In those circumstances a range of other questions and factors would be involved (including VAT and Insurance Premium Tax) and this is outside the scope of the question being asked here.

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