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Warranty and indemnity insurance
Tax insurance covers a specific, identified tax risk in a deal, such as whether a relief applies, which a W&I policy would normally exclude because it is already known. It lets a deal complete without a large escrow or price cut for a tax point the advisers believe is sound.
Part of: Warranty and indemnity insurance explained
In short
W&I insurance covers unknown tax liabilities, but tax risks found in due diligence are usually excluded. A tax insurance policy is underwritten separately for one or more identified issues, where the parties' advisers think the position is likely to be correct but HMRC could challenge it. Cover commonly includes the tax, interest and defence costs, and sometimes penalties where insurable. Underwriters want the tax analysis, the facts and any HMRC correspondence. Policy periods are often set around HMRC's assessment time limits. Avoidance arrangements and known HMRC enquiries are commonly excluded. Cover is subject to the insurer's acceptance and the policy terms.
A W&I policy usually covers breaches of the tax warranties and claims under a tax covenant or tax deed, but only for liabilities nobody knew about. Where the policy replaces the seller’s tax covenant it is sometimes called a synthetic tax deed: the insurer gives the cover rather than the seller. Once a tax risk has been identified in due diligence, the W&I insurer will normally exclude it. Our W&I definition explains the wider policy.
Tax insurance fills that gap. It is a separate policy, or a separate section, written for a named tax issue. The underwriter is judging the strength of a tax position, not the quality of a whole due diligence exercise.
| Point | W&I tax cover | Tax insurance |
|---|---|---|
| Risk covered | Unknown tax liabilities and warranty breaches | A specific tax issue that has been identified |
| Underwriting focus | The due diligence as a whole | The technical tax analysis of that issue |
| Typical use | General protection on most deals | Where a known tax point would otherwise hold up the price or the deal |
| Who is insured | Usually the buyer | Buyer, seller or the target, depending on the structure |
Tax insurance is typically sought where the advisers consider a position more likely than not to be right, but the amount at stake is large enough that the parties want certainty. Illustrative examples include:
Whether any particular risk is insurable depends on the facts and the analysis. Some insurers will not cover issues that are essentially disputes about facts, or that HMRC is already looking at.
Underwriters commonly ask for:
HMRC clearance is a separate route to certainty. HMRC’s Non-Statutory Clearance Service gives written advice where there is genuine uncertainty about how the law applies. HMRC says requests for reassurance will not be accepted, and it will not give clearance on tax planning, on transactions it regards as tax avoidance, or on positions under an open HMRC check. Its target is to reply within 28 days, and you can rely on the advice only if the information supplied was accurate and complete and the transaction is carried out as described. Some company reorganisations have statutory clearance procedures instead.
Clearance and insurance are not alternatives in every case. Some parties seek clearance where it is available and insure the remaining risk. An insurer will want to know whether clearance was sought and what HMRC said.
Tax insurance periods are commonly set by reference to how long HMRC could raise an assessment. For corporation tax, Finance Act 1998, Schedule 18, paragraph 46 sets a general limit of four years after the end of the accounting period. That extends to six years where the loss of tax was brought about carelessly, and to twenty years where it was brought about deliberately, along with some other cases involving failures to notify.
Policies therefore often run for several years, with the precise period, the limit and the retention negotiated for each deal. A policy that ends before HMRC can no longer assess leaves a gap, so check the period against the tax and the accounting periods involved. If HMRC does challenge the position, the claim process is similar to a W&I claim; see how W&I claims work.
As with W&I, the insured must make a fair presentation of the risk under the Insurance Act 2015. For tax insurance that usually means disclosing every piece of advice on the point, including advice that disagreed; see the fair presentation duty. See what W&I excludes for how tax fits into the wider policy.
Tax insurance for a deal is different from tax investigation insurance, which pays professional fees for dealing with an HMRC enquiry but not the tax itself; see legal expenses and tax investigation insurance and HMRC tax investigation costs.
Apex arranges warranty and indemnity (W&I) and M&A insurance. A broker reads each enquiry and comes back with options; there is no fee for a quote, and cover is subject to the insurer’s acceptance and the policy terms. To quote we need the target’s business activities, turnover, location and claims history, plus the tax issue, the adviser’s analysis, the amount at stake, any HMRC correspondence and the deal timetable. See warranty and indemnity insurance explained, due diligence and W&I underwriting and buy-side vs sell-side W&I.
It is a policy covering a specific, identified tax risk, such as whether a relief or exemption applies to a transaction. If HMRC later successfully challenges the position, the policy commonly pays the tax, interest and defence costs up to the limit. It is used where a W&I policy would exclude the risk because it is already known.
W&I commonly covers unknown tax liabilities through the tax warranties and, often, a synthetic tax deed. Tax risks identified in due diligence are usually excluded. Those identified risks can sometimes be covered by a separate tax insurance policy, a specific indemnity from the seller or a price adjustment.
It depends on the issue. HMRC's non-statutory clearance service only deals with genuine uncertainty and will not clear tax avoidance or matters under an open check. Its target is 28 days. Some parties seek clearance where available and insure what remains. Your tax adviser can say which route suits the point.
Periods are commonly set around how long HMRC could assess the tax. For corporation tax the general limit is four years after the end of the accounting period, six years for careless behaviour and twenty for deliberate behaviour. The period is negotiated for each policy, so check it against the tax at risk.
No. Tax investigation insurance pays an accountant's fees for handling an HMRC enquiry and does not pay the tax. Tax insurance in a deal is underwritten for a specific identified risk and is designed to pay the tax itself, usually with interest and costs, if HMRC's challenge succeeds.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Start a commercial enquiry Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
