Is Tax Investigation Insurance Tax Deductible?
Share
The short answer
Generally, no — and unlike some providers, we'd rather tell you that plainly. HMRC's own guidance takes the view that premiums for fee protection insurance are not an allowable expense for tax purposes. The good news is that the case for the cover was never really about the deduction — and we'll show you the maths below.
What HMRC's guidance actually says
HMRC's position is set out in its Business Income Manual at BIM46452. The logic runs in three steps:
1. A premium is only allowable if the costs it insures would themselves be allowable. In HMRC's words: "Premiums paid to insure against the risk of incurring additional professional costs are allowable for tax purposes only if those additional costs would themselves have been allowable."
2. Some enquiry costs are not allowable. Accountancy fees for defending an enquiry are treated as non-deductible where "the enquiry reveals inaccuracies and additional liabilities... and those inaccuracies are careless or deliberate." Since no one knows at the outset how an enquiry will conclude, every policy necessarily insures some risks whose costs would not be allowable.
3. You can't split the premium. HMRC does not permit apportioning the premium between the allowable and non-allowable risks it covers: "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."
Put together: because the policy covers some outcomes whose costs would be disallowed, and the premium can't be split, the whole premium falls outside "wholly and exclusively" and is not deductible — even if you never make a claim.
Does that change if I buy through my accountant's scheme?
Sometimes accountants bundle fee protection into their practice's service charge rather than selling you an identifiable insurance premium, and the tax treatment of those arrangements is argued about among accountants. If you pay under a practice scheme, ask your accountant how they treat it. If you buy a standalone policy — from us or anyone else — HMRC's published position above is the safe assumption.
What about the accountancy fees during an enquiry itself?
A related question with a happier answer. Your normal annual accountancy fees for preparing accounts and returns are allowable as usual. Additional fees defending an HMRC enquiry into your business are also generally allowable where the enquiry results in no additional tax, or any adjustment arises despite reasonable care — it is only where the enquiry reveals careless or deliberate inaccuracies that the defence costs become disallowable. Of course, if you hold a FeeProtect policy, those fees are paid by the insurer anyway — up to £100,000, with no excess.
Is there VAT on tax investigation insurance?
No — insurance is exempt from VAT, so there is nothing to reclaim. Instead, Insurance Premium Tax (IPT) at 12% applies, and the prices you see on FeeProtect.com already include it. What you see is what you pay.
The maths that actually matters
Suppose you're a sole trader paying £122.40 a year for cover. Even if the premium were deductible, basic-rate relief would be worth roughly £24 — that was only ever a discount, not the point. Now suppose HMRC opens an enquiry and your accountant spends £1,500 of time defending you (a modest amount for a full enquiry; many run far higher). Without cover, that £1,500 comes out of your pocket even if the enquiry finds nothing wrong. With cover, it's paid by the policy.
The value of tax investigation insurance was never the tax treatment of the premium. It's not paying £1,500-plus in professional fees at the worst possible moment.
This article is general information, not tax advice. Tax treatment depends on your individual circumstances and may change. If you are unsure how any of this applies to you, speak to your accountant or a tax adviser.