Business insurance

Conditions

1. GOV.UK's self-employed expenses guidance says 'You can claim for any insurance policy for your business', giving public liability insurance as its example, and lists professional indemnity insurance premiums among the costs you can claim. HMRC's Business Income Manual (BIM45500) states the test: whether insurance premiums are deductible from trading profits depends on what is insured and whether the insurance has been taken out for the purposes of the trade.
2. Examples HMRC gives: annual premiums insuring business fixed assets against damage or loss are allowed where incurred wholly and exclusively for the purposes of the trade, even on a 'new for old' basis (BIM45501); premiums insuring against loss of profits from events such as a fire at the business premises are allowable (BIM45510); and where an employer insures against general liability under the law to pay compensation, the premiums are allowable (BIM45525).
3. Premiums a sole trader or partner pays for life, accident or sickness insurance cover for themselves or a partner are not allowable (BIM45560). HMRC notes these are often known as permanent health insurance policies, and that the benefits paid under them are not trading income.
4. Key person insurance: a business can take out a policy in its own favour insuring against loss of profits from the death, critical illness, sickness, accident or injury of an employee, director or other key person. HMRC allows the premiums only if both its conditions are met: the sole purpose is the trade purpose of meeting a loss of trading income from losing that person's services, and a life policy is term insurance covering only death within the term, with no other benefits and a term not extending beyond the person's usefulness to the business (BIM45525). HMRC says there may be a non-trade purpose where the policy covers directors who are major shareholders but not other employees (BIM45530). Ask an accountant before relying on a deduction.
5. For a limited company, the same manual tests apply, and the wholly and exclusively rule is section 54 CTA 2009. Premiums a company pays to indemnify its employees against legal action taken against them personally for actions in the course of the employment are allowable for the company (BIM45520); the employee is charged on the benefit of that cover (EIM30501). HMRC says relief against that charge is due in some circumstances (EIM30501): section 346 ITEPA 2003 can give an offsetting deduction in respect of qualifying liabilities where the policy is a qualifying insurance contract (EIM30505; see the employee condition below). Whether a policy qualifies is a question for an accountant.
6. Employees: section 346 ITEPA 2003 allows a deduction from earnings for a premium under a qualifying insurance contract, to the extent it relates to indemnifying the employee against a liability related to the employment, or to cover for certain costs and expenses connected with claims, proceedings or investigations relating to the employment (section 346(1), paragraphs B, BA and BB; EIM30509). HMRC says this includes employees who pay for or towards their own indemnity insurance (EIM30505). A mixed policy that also covers other liabilities does not qualify (EIM30513). Other business insurance is not an employee's cost to claim: an employee can deduct an expense only where they are obliged to incur and pay it as holder of the employment (section 336 ITEPA 2003).

Common mistakes

• A sole trader claiming life, accident or sickness cover for themselves as a business cost — HMRC says these premiums are not allowable (BIM45560).
• Including the private element of a mixed policy. Only an identifiable part or identifiable proportion incurred wholly and exclusively for the purposes of the trade can be deducted (section 34 ITTOIA 2005; section 54 CTA 2009 for a company).
• Assuming a key person policy is always deductible — HMRC's conditions in BIM45525 must be met, and a policy covering only directors who are major shareholders may have a non-trade purpose (BIM45530).

What to keep

• Policy schedules and premium invoices.
• For a key person policy, a record of why the business took it out — HMRC treats whether the sole purpose condition is met as a question of fact (BIM45530).

Real-world example

A freelance consultant pays for professional indemnity cover required by their clients. The premium is wholly for the business and is allowable in full.

Frequently asked