IPs turn to tax insurance following HMRC change - EXCLUSIVE
31 January 2024
IPs are increasingly considering taking out tax insurance following HMRC’s decision last month to stop providing tax clearances on MVL cases, insurance specialists say.
HMRC announced in December it would no longer provide pre- and post-tax clearances in MVL cases at the end of 2023, citing the fact that there was no statutory or best practice framework for the clearances to be provided. Instead, cases must be closed with IPs using their own professional judgment.
Giles Hambly, head of tax Insurance at Gallagher, said: “The use of tax insurance in all contexts has increased exponentially over the last five years, and in liquidations and insolvency it continues to develop. We have seen increasing interest from the sector, but since the change in HMRC’s position we are having more conversations about how tax insurance might be used and have seen an uptick in enquiries, despite a low awareness and utilisation of the product in the space previously.
“Following HMRC’s announcement, IPs seeking sufficient comfort to close cases may need to explore other avenues and tax insurance is an attractive alternative for the protection of the IP and for the creditors or beneficiaries of the liquidation of assets. Further, it is usually possible to finalise and incept a tax insurance policy in a matter of weeks as opposed to months or years.”
Will Hess, head of tax Insurance at specialist tax insurance underwriter Solertia, has also had conversations with IPs about the possible use of tax insurance products following the change from HMRC. Hess said: “the critical point is that tax insurance is not there to replace the usual level of diligence or professional judgment, but to give the additional comfort which would previously have come from an HMRC clearance.
“Providing the client or the IP has undertaken thorough diligence (similar to the level which would previously have been provided to HMRC), and the information is in place to support the conclusion that there shouldn't be any future unexpected exposures, tax insurance is potentially able to cover both identified and unidentified tax risks crystallising post-liquidation.”
Hess added that “tax insurance is likely to be very useful in situations where clients and IPs would previously have expected to have received clearance but where this is obviously no longer possible due to the changes.”
However, some IPs are sceptical about the possible use cases for tax insurance in relation to MVLs, highlighting that the law about claims is well established under the Insolvency Act 1986.
Jeremy Frost, director of Frost Group and licensed IP said: “We can’t see how the insurance would bite. You have a declaration of solvency, which is either correct with no unreported tax to pay or it is wrong, in which case the insurance is unlikely to pay out as not all of the facts will have been disclosed. Whatever comfort the insurance offers will likely be psychological rather than physical. The law on how creditor claims are approved is clear in the Insolvency Act. The only change to such a process might be if there is a fraud involved, in which case the insurance wouldn’t cover it anyway.”
One IP who declined to be named said: “Following the HMRC change we beefed up our indemnity insurance and we always advertise for people to claim, which includes HMRC, so we do not see the need for tax insurance. It is difficult to justify the insurance as a cost of the insolvency.
“We might take a different view if the circumstances were different. For example, if we were working with unknown accountants, companies with a significant number of shareholders or of a significantly larger size.”
It is understood the costs of tax insurance are likely to be prohibitive for smaller company insolvencies, such as those with a turnover of less than £100,000 per year, but both insurance specialists believe competition in the market and the bespoke nature of the product is likely to mean a variety of packages will be offered in the future.
Darrel Lamsdale, executive director for tax and contingent risks at Howden said “With cases having to be closed without a tax clearance, we are likely to see an increase in enquiries for tax insurance from insolvency practitioners this year. Having seen a material uptick in the cover being applied to similar circumstances, the tax insurance market will be ready to respond with the requisite level of expertise and capacity.”
One of the most common criticisms of HMRC from IPs prior to December related to delays caused by the need to wait for tax clearance on MVL cases. Complaints raised at R3’s SPG Forum included examples where professionals had been waiting more than two years for clearances and had suffered difficulties receiving communication from the tax authority. By contrast, as Hambly notes, the process to obtain insurance cover can take as little as two weeks to a month, provided there are no significant complications.
