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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Specific deductions: professional fees: fee protection insurance

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. 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.

Insuring against the cost of tax enquiries

When accountancy fees incurred in connection with an investigation are allowable is explained at BIM46450 and EM3981. Additional accountancy expenses incurred because of such an enquiry are not allowable if:

  • the enquiry reveals inaccuracies and additional liabilities for the year of enquiry (or any earlier year), and
  • those inaccuracies are careless or deliberate (no penalty should arise where the inaccuracy has arisen despite reasonable care being taken).

Where the fee protection policy entitles the policyholder to claim (amongst other risks covered) for the cost of accountancy fees incurred in negotiating additional tax liabilities resulting from careless or deliberate inaccuracies, the premiums paid on the policy are not allowable deductions from trading income.

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 cover some risks where the related costs are not allowable for tax purposes.

The decision in McKnight v Sheppard [1999] 71 TC 419 (see BIM37965) does not affect this analysis. That case concerned fines imposed in disciplinary proceedings and the associated legal expenses. Lord Hoffmann made the point that tax fell into an entirely separate category from the set of issues concerning fines, penalties and damages dealt with in that case and in earlier related cases.