Tax Liability Insurance
- Jurisdictions: no restrictions (other than the United States), we are supported internationally by a network of top-tier tax advisers
- Taxes: no restrictions
- Duration: up to a maximum of 7 years
- Limits: up to £40,000,000 (or local equivalent)
- Insureds: able to cover both individuals and corporates
- Advance tax payment / guarantee: available on a case-by-case basis, subject to an additional premium
Brexit: we are authorised to underwrite in the EEA and so our ability to underwrite insurance and the validity of our policies will not be affected by the UK’s exit from the EU
What is tax liability insurance?
In an increasingly complex tax environment, tax liability insurance seeks to offer a simple, innovative, confidential and efficient solution for sophisticated issues by allowing a taxpayer to reduce or eliminate a tax exposure.
The purpose of tax liability insurance is to protect against differing interpretations of tax law. In essence, it is a tool that provides tax treatment certainty in order to facilitate activities by both corporates and individuals or alternatively to assist boards, investment committees, asset managers, finance providers, etc with managing risk.
In a mergers and acquisitions (M&A) context, warranty and indemnity (W&I) insurance has become commonplace. However, unlike a typical W&I insurance policy, tax liability insurance covers identified risks and can offer a solution in a multitude of scenarios (e.g. reorganisations, asset purchases, liquidations or mitigation of historic risks).
Covered losses can include the tax suffered, defence costs, interest, penalties and grossing-up to take account of tax borne on the insurance proceeds.
When can tax liability insurance help?
Ultimately, tax liability insurance offers a new way to manage risk, offer the certainty required to allow a transaction to progress or, importantly, save time.
In particular, tax liability insurance can be used to:
give peace of mind in relation to a historic tax position;
- remove the need for an escrow or reserve;
- stand behind or replace an indemnity;
- prevent price negotiations or delays by mitigating identified risks;
allow investment funds to be liquidated and proceeds returned to investors;
provide a liquidator with the comfort required to release proceeds;
- remove uncertainty from a restructuring or reorganisation;
- mitigate a risk to allow for favourable financing terms;
- provide a greater limit of liability than a counterparty is willing or able to offer (e.g. the insurance sits in excess);
- secure catastrophe cover (e.g. where a tax liability, no matter how remote, is unconscionable);
increase covenant strength and manage recoverability risk (Lloyd’s syndicates are all rated A by AM Best or A+ by Standard and Poor’s and Fitch);
reduce uncertain accounting tax positions or tax expenses; or
provide a quicker and confidential alternative to a tax authority clearance (or provide the comfort of a clearance if this is not available).
What can be covered by tax liability insurance?
Among other factors, insurability depends on:
- the likelihood of a challenge by a tax authority (the risk should be considered low);
- the defensibility of the position taken (there should be defences available and the appropriate documentation/evidence should be available);
- the fact pattern relating to the risk (insurers will rely on the facts as represented to them – see below);
- the situs of the risk (the relevant jurisdiction should have a stable court system with a concept of legal certainty);
- the quantum of the liability; and
- the motivation for insurance.
Although tax liability insurance will not offer protection against any divergence from the facts presented to the insurer, it is possible to insure whether a legal test is met on the facts as represented.
Tax liability insurance is not available for intentional tax avoidance/evasion or marketed schemes.
A pdf copy of our tax brochure is available here.