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What’s driving the UK tax insurance boom?

Author: ICAEW Insights

Published: 26 Jan 2024

Lower prices, deeper expertise and broader risk appetites are just some of the factors behind huge growth in the market.
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Tax insurance in the UK has seen massive growth in the past five years. Marsh Specialty Head of Tax Insurance Dr Leon Steenkamp says the sector has become much more active since he joined in 2018.

“At that point, there were three or four providers,” he says. “Now, there are more than 10. That competition has put downward pressure on the cost. It used to be very expensive to buy tax insurance. Now, it can be purchased for a far more reasonable price.”

Mainly bought by companies but sometimes individuals, tax insurance protects holders from the risk of authorities successfully challenging their tax position. For example, companies could use it as a safeguard against costly rulings in HMRC disputes.

One growth factor, Steenkamp notes, is that tax insurers have beefed up their internal expertise. “They have senior people, such as law-firm partners, who understand the risks and are comfortable in that world,” he says. “They also have networks of advisers – not just in the UK, but other countries where they work. That depth of expertise has fed a huge expansion of providers’ risk appetites.”

According to Steenkamp, the market’s biggest global hubs are New York and London.

Substance test

Steenkamp says growth in the UK tax insurance market is coming from five main uses:

1) General mergers and acquisitions (M&A)

 During an M&A deal, a buyer may find historical tax exposures within the target company. In certain cases, those exposures may be insurable.

“In a deal where a private equity firm is the seller, that firm would typically not want to provide indemnities for risks linked to the target – especially around tax,” Steenkamp says. “So we’ve seen lots of growth in that area, to transfer risks related to the target’s tax history from the buyer to the insurer.”

2) Losses in M&A

A target company may have lots of losses that the buyer wants to use as a post-deal asset. For example, the buyer may wish to write down its profits against them. But in some jurisdictions, those losses are forfeit if the target changes the nature of its trade.

“It’s a big question,” says Steenkamp. “You’re buying the company because it needs tweaking to become profitable. But at what point do your tweaks become major changes? This is a grey area that HMRC won’t even rule on – and forfeiting those losses could be a costly disaster. So tax insurance can step in.”

3) Restructurings in a non-deal context

 Any company that wants to move part of its business from one country to another would have to check that it is acting in line with local tax rules. It could get a ruling on that from the relevant authorities – but there is a snag.

“Depending on the jurisdiction, rulings can take a very long time to come through,” Steenkamp says. “And you can’t wait around for six months to start your restructuring. Your adviser may say your plan is mostly fine, but risks remain on certain steps. Unlike rulings, tax insurance can be obtained quite quickly. So in a few weeks, you can insure those risks, in lieu of a ruling.”

Steenkamp points out that, in jurisdictions where rulings come through quickly, uptake of tax insurance tends to be lower.

4) Double-tax treaty risks

 Global companies will often rely on the measures of double-taxation treaties to secure relief, Steenkamp explains.

However, such treaties set conditions, one of which is a substance test: has the company set up a true presence in the jurisdiction where it plans to enjoy the benefits of the treaty? Or is it a ‘brass-plate’ spinoff, formed of little more than a bank account? “In this case, tax insurance can provide coverage for uncertainty over substance,” says Steenkamp.

5) Recapitalising portfolio companies

 “Restructuring debt is a potential source of tax issues,” Steenkamp says. “Your tax adviser may not think your distributions should be liable, but may caution that the authorities could disagree. This is another area of uncertainty that tax insurance can address.”

Robust advice

HMRC and other authorities may generally be aware of the existence of tax insurance, Steenkamp says, but are not known to be concerned about it. “It’s not really relevant to them. From a technical standpoint, they are just looking for companies to pay the correct tax. If you have insurance in the background, that’s your decision.”

Steenkamp notes that accountants are becoming more aware of tax insurance, and can use that knowledge to add value to their services. “They can tell clients, ‘We can’t be 100% sure this is your tax position, because of factors X and Y’ or ‘This ruling is going to take too long’ and then point out that insurance is an option.”

Accountants are also playing a key role in the tax insurance market itself, by helping to create risk analyses for potential clients. “Much depends on that advice being robust and assured, because we use it to approach the insurance market on clients’ behalf,” Steenkamp says. “So it should not contain too many assumptions. The problem with assumptions is that they’re often also adopted by the insurer – unless they can be proved during underwriting.”

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