This guidance supersedes the article in TB65 (June 03) about
premiums for fee protection insurance relating to the costs of
possible future tax enquiries.
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.
When accountancy fees incurred in connection with an investigation are allowable is explained at BIM46450 and EM9010. Additional accountancy expenses incurred because of such an enquiry are not allowable if:
A premium on a fee protection policy, which entitles the
policyholder, amongst other risks covered, to claim for the cost of
accountancy fees incurred in negotiating additional tax liabilities
resulting from negligent or fraudulent conduct, is not an allowable
deduction. Furthermore it is not possible to apportion the premiums
since it is impossible to identify a part that has been incurred
wholly and exclusively for the purposes of the trade or profession.
The cost remains disallowable even if the taxpayer makes no claim
under the policy or only claims expenses that are allowable. This
is because the premiums covered some risks where the related costs
are not allowable for tax purposes.
The decision in McKnight v Sheppard (
BIM37965) does not affect this analysis.
That case concerned fines imposed in disciplinary proceedings and
the associated legal expenses. Lord Hoffman (71TC at page 453) made
the point that tax fell into an entirely separate category from the
set of issues concerning fines, penalties and damages dealt with in
McKnight v Sheppard and earlier related cases.
