Contractors’ Questions: Can my limited company claim professional indemnity insurance?

Contractor’s Question: Is professional indemnity insurance a cost that my limited company can pay for in its entirety?

My contract has changed to stipulate I need PII and while not an extortionate cost for my company to absorb, it’s still a new outlay I hadn’t planned on forking out for, and so can my company pay for PII, or is it just tax-deductible?

Expert’s Answer: Your question is specifically about Professional Indemnity Insurance, but it raises the general question of whether a cost is allowable as a deduction in arriving at the taxable profit. If it is, the cost is referred to as ‘tax deductible’.

The expenses rule

For a company, the general rule is that any cost the company incurs, that is wholly and exclusively for the purpose of the company’s trade, is tax deductible (with a few specific exceptions). Please note that the cost doesn’t need to be necessary, but it does have to be wholly and exclusively for the trade.

Professional Indemnity Insurance (PII) is a fairly standard requirement from contractors’ clients. Where their contract is with your limited company, the client needs protection from a policy in the limited company’s name.

Be aware that the cost of insurance includes the premium, Insurance Premium Tax (IPT), currently 12% for PII, plus any administration charges by the insurer, or the insurance broker.

Yes, your company should pay for it

The full cost, including IPT, is a genuine business cost, wholly and exclusively for the purposes of the company’s trade and, therefore, is tax deductible. The company should pay for it and will obtain tax relief (at 19%) on that cost.

Incidentally, the requirement for PII is an indicator that the contract falls outside IR35 as an employee would not be expected to have cover personally.

PII after your limited company stops trading

Contractors who stop trading through their limited company, perhaps because they retire, take up permanent employment or take a contract through an umbrella company, should be aware of the ongoing potential for a professional indemnity claim. 

A claim could be made some time after the work was undertaken. PII is normally provided on a ‘claims made’ basis, which means that cover has to be in place when the claim is made.

Run-off cover

It would be prudent to continue with cover, known as ‘run off’ cover, after the company ceases trading, to cover claims that may arise for previous work. How long it should be continued will be down to the contractor (or stipulated in the contractor’s contract with the client), but the risk of a claim obviously reduces over time -- and it may be that, after, say, a year, the risk is deemed to be insignificant.

PII cover need not be expensive, as you indicate in your question but, nevertheless, you probably don’t want to pay for it unless you have to.  

Just to reassure you, some clients include the requirement as a standard clause in their contracts, even if the work the contractor undertakes is not of the type of work usually covered by PII. In those cases, I would say it is worth asking the client to remove the clause from the contract.

Final thought

Generally speaking, you need professional indemnity insurance if you provide professional advice, services or designs. And remember, your industry association/regulatory body may require you to have it. Knowing that PII is indeed a cost that limited company contractors can put on their company should therefore help!

The expert was chartered accountant Graham Jenner, founder of tax advisory Jenner & Co.