Professional indemnity insurance

Conditions

1. Professional indemnity insurance premiums are listed among the costs you can claim in GOV.UK's guidance on allowable expenses for the self-employed. HMRC's Business Income Manual (BIM45515) confirms that 'premiums on an indemnity policy providing cover for professional negligence are allowable as a deduction.'
2. Whether a client contract requires the cover or you choose to take it out, the tax test is the same: the premium must be incurred wholly and exclusively for the purposes of the trade. For a sole trader that rule is section 34 ITTOIA 2005; for a company it is section 54 CTA 2009. If a premium is paid for more than one purpose, a deduction is still possible for any identifiable part or identifiable proportion of it that is incurred wholly and exclusively for the purposes of the trade.
3. Whether you must hold PI cover, and at what level, is for your regulator, professional body or client contracts to say — check their current rules rather than assuming a profession-wide requirement or figure.
4. Run-off cover paid for after you have permanently stopped trading falls under the separate rules for post-cessation expenses. Among the expenses HMRC's Business Income Manual (BIM90080) says are likely to be post-cessation expenses is insuring against liabilities arising out of claims about defective work done or services rendered while the business was continuing. The expense still has to meet the wholly and exclusively test and be revenue, not capital, expenditure, and it is not allowable if it relates to the cessation itself. BIM90090 sets out four different ways post-cessation expenses can be relieved for those subject to Income Tax, such as a sole trader: deducted from post-cessation receipts, set against total income (post-cessation trade relief), deducted from chargeable gains, or carried forward to be deducted against future post-cessation receipts from the same trade. Companies subject to Corporation Tax are only able to use the first and the last of these. Post-cessation receipts always come first, and the second and third are only possible where the expenditure falls into certain categories. Which of these applies to you, and what it is worth, depends on your own circumstances, so take advice from an accountant before you rely on any of them.
5. For a limited company, the wholly and exclusively rule is section 54 CTA 2009. Where the company pays premiums on a policy to indemnify its employees against legal action taken against them personally for actions in the course of their employment, HMRC says those premiums are allowable in computing the company's trading profits, because they are not capital expenditure and are incurred wholly and exclusively for the purposes of the trade (BIM45520). On the director's or employee's side, HMRC says employer-paid cover against their liabilities for wrongful acts or omissions gives rise to a charge on them in respect of the benefit of the insurance cover (EIM30501), and that section 346 ITEPA 2003 allows deductions equal to and so offsetting those charges in respect of qualifying liabilities (EIM30505).
6. An employee who pays for their own indemnity cover may be able to deduct the premium from their earnings. Section 346 ITEPA 2003 allows a deduction for a premium under a qualifying insurance contract, to the extent that the premium relates to indemnifying the employee against a liability related to the employment or to paying certain related costs and expenses, and HMRC says this includes employees who pay for or towards their own indemnity insurance (EIM30505). The deduction is available only against earnings of the employment concerned (EIM30505). A qualifying insurance contract must meet the conditions in section 349 ITEPA 2003; among them, a policy that covers both qualifying and other liabilities — a mixed policy — does not qualify (EIM30513). Whether your own policy qualifies is worth checking with your insurer or an accountant before you claim.

Common mistakes

• Confusing PI insurance with public liability insurance — they cover different risks. PI covers claims from clients alleging your professional work caused them a financial loss; public liability covers injury or property damage to third parties arising from your business activities.
• Assuming a run-off premium paid after you have stopped trading is relieved like an ordinary business expense. After cessation the post-cessation rules apply, and which reliefs are available depends on who you are — see the conditions above.
• Underestimating the required cover level — many client contracts specify a minimum indemnity limit; check contract requirements against the policy limit before renewing.
• An employee assuming their own indemnity cover can never be claimed. Section 346 ITEPA 2003 can allow a deduction from earnings for a premium under a qualifying insurance contract (EIM30505), although a mixed policy that also covers other liabilities does not qualify (EIM30513).

What to keep

• Policy schedule showing the policyholder, indemnity limit, period of cover, and premium.
• Premium invoices or payment records.

Real-world example

A freelance management consultant trading as a sole trader is required by her main client contract to hold PI cover. She pays the annual premium herself. The premium is allowable in full — it is incurred wholly and exclusively for her business, covering the risk of a claim arising from advice given to the client, and HMRC's Business Income Manual says premiums on an indemnity policy providing cover for professional negligence are allowable as a deduction (BIM45515).

Frequently asked