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Markel Tax

Tax indemnity case studies

The benefits of securing the labour supply chain

Markel Tax were approached by a third party acting for the sale of a recruitment group where the due diligence report had identified a range of risks where there could be a significant seven figure liability to account in respect of PAYE and/or employer and employee National Insurance Contributions.

The Group’s activities and involvement in the supply chain meant that these risks involved the full gamut of potential employment status risks: consideration of payments made to PAYE temps, Umbrella Workers and Limited Company Contractors. There were differing levels of exposure to Agency Workers Legislation, Travel & Subsistence rules, workers potentially caught by Supervision, Direction and Control, the Managed Service Legislation and the operation of the Construction Industry Scheme.

Markel Tax were asked to review the tax risk assessment and then determine the key risks to be insured so that the purchaser would have the necessary level of comfort to proceed with the purchase and the vendor could achieve the full value of the purchase.

The client opted not to insure the defence costs, but did require a limit of indemnity of £1million to meet any tax liability, which might arise over a subsequent 7-year period. The client now has the peace of mind to continue its operations knowing that its largest single financial risk is covered and has also benefited from advice which has enabled the business to reduce some of these risks in the future. There is also the added by-product that having secured its position, the business is also a more attractive supplier to its customers.

Clearing the way forward when clearance had been denied

This case is perhaps a classic example of why Tax Indemnity Insurance has such an important role to play when there is any tax uncertainty in relation to a genuine commercial transaction.

In an attempt to grow its business, one of two connected businesses was seeking to secure an injection of funds, which would be provided on the back of a company reorganisation which involved a share for share exchange and a cash consideration for one of the shareholders who was seeking to exit the business and claim Entrepreneur’s Relief.

Clearance was obtained from HMRC for the share for share exchange, but not for the Transactions in Securities provisions, with HMRC keeping their options open as to whether they might issue a counteraction notice.

The client was seeking cover for the defence of the counteraction notice and the tax liabilities which might arise if HMRC were successful in arguing that the income should not qualify for entrepreneur’s Relief, but rather be taxed at dividend rates.

Based on the report of a subject matter expert, we were able to insure a £250K exposure and arrange the cover within a working week. A great example of tax advisers working with private equity to arrange an insurance-backed solution that will enable a client to grow their business.

New form of investment, but potentially the same old tax implications

This practice’s client had decided to invest t funds in a relatively new form of derivatives for which HMRC guidance is not too precise. A decision had to be taken to determine whether the gains made during the year should treated as trading income or taxed as a capital gain.

Whilst the argument for treatment of the income as being chargeable to CGT was strong, there was sufficient doubt that the client wanted the reassurance of a policy which would cover the liability to tax interest and penalties, as well as the defence costs to argue the position with HMRC.

Markel Tax was approached and after reviewing the tax position and third party opinion available on the matter, a limit of indemnity for both legal expenses and tax loss cover of almost £1 million was arranged.

We have been able to insure this situation for a number of clients.

Once again we were able to offer reassurance where there was much uncertainty. The key point being is that as financial and transactions evolve, the flexibility of ability to arrange tax indemnity insurances keeps apace with the change.

Insured solution for PAYE and NIC liabilities

Prior to the disposal of a company by a number of individuals, it was identified that a tax liability under the old conditional share regime would have been triggered under ITEPA 2003, s 427 (as originally enacted) on the disposal. The sellers and the buyer took advice and the sellers undertook a presale reorganisation in order to seek to avoid such a charge arising.

The parties were advised that, as a result sale reorganisation, there was a risk that a number of other provisions in ITEPA 2003, Part 7 (employment-related securities) could apply, giving rise to a potential PAYE and NIC liability for the target company. The buyer insisted on the sellers giving a specific indemnity in respect of such liabilities and the sellers sought insurance against having to pay out under that specific indemnity. A tax indemnity policy was put in place.

VAT on land & buildings: a ‘design and build’ indemnity solution

An insurance solution was sought for a scheme involving a land development incorporating the construction of a number of holiday homes.

Under the scheme, the land owner and building developer (which were connected parties) entered into separate but inter-conditional contracts with the purchaser of the land – for the freehold sale of the land and subsequent design and built services respectively (rather than a single sale of land containing completed holiday homes). A tax indemnity policy was put in place that covered the risk of a successful challenge from HMRC that the sale of the land would be standard rated as opposed to exempt.

These scenarios show the potential applications and possible scope of Tax Indemnity Insurance. Please note that they are illustrative only and not to be relied on to justify coverage in any particular situation.