Question from the contractor: Is professional liability insurance a cost that my public limited company can bear in full?
My contract has changed to state that I need PII and although it’s not an exorbitant cost for the company to absorb, it’s still a new expense that I hadn’t expected to incur, and so I can my business pay for PII, or is it just tax-deductible?
Expert Answer: Your question relates specifically to professional indemnity insurance, but it raises the general question of whether a cost is deductible to arrive at the taxable profit. If so, the cost qualifies as “tax deductible”.
The expense rule
For a business, the general rule is that any cost incurred by the business, which is entirely and exclusively for the purposes of the business activity of the business, is tax deductible (with some exceptions). Please note that the cost does not need to be necessarybut it is necessary entirely and exclusively for trade.
Professional liability insurance (PII) is a fairly common requirement from contractors’ clients. When their contract is with your limited liability company, the customer must be protected by a policy in the name of the limited liability company.
Be aware that the cost of insurance includes the premium, the Insurance Premium Tax (IPT), currently 12% for PII, plus the administration fee of the insurer or insurance broker.
Yes, your company should pay for it
The total cost, including the IPT, is a true business cost, entirely and exclusively for the purposes of the business activity of the company and, therefore, is tax deductible. The company will have to pay it and will obtain a tax reduction (at 19%) on this cost.
Incidentally, the PII requirement is an indicator that the contract does not fall under IR35, as an employee should not be personally covered.
PII after your LLC goes out of business
Entrepreneurs who cease to operate through their limited liability company, perhaps because they are retiring, taking up permanent employment or accepting a contract through an umbrella company, should be aware of the permanent potential of a professional compensation claim.
A claim could be made some time after the start of the work. PII is normally provided on a ‘claims made’ basis, meaning that coverage must be in place when the claim is made.
It would be prudent to maintain the so-called “run off” coverage after the business ceases to cover claims that may arise for previous work. The duration of the lawsuit will depend on the contractor (or will be stipulated in the contractor’s contract with the customer), but the risk of a claim obviously diminishes over time — and it may be that after, say, one year, the risk is considered negligible.
PII coverage doesn’t have to be expensive as you state in your question, but still, 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 is undertaking is not the type of work usually covered by PII. In these cases, I would say it is worth asking the customer to remove the clause from the contract.
Generally speaking, you need professional indemnity insurance if you provide professional advice, services or designs. And remember that your industry association/regulatory body may require you to have it. Knowing that PII is indeed a cost that the limited company contractors can impose on their business should therefore help!
The expert was CPA Graham Jenner, founder of Tax Advisory Jenner & Co.