Issues relating to taxation are the biggest cause of Warranty and Indemnity (W&I) claims in the UK according to latest research from Aon.
The most typical taxation issues that result in liabilities range from VAT to Corporation tax or PAYE issues.
Commenting on taxation liability, Anka Taylor, director of Aon's Transaction Liability Unit, said: “Our latest research highlights the steady rise in tax related claims over the past seven years.
"From a financial perspective there is no middle ground, you either have a tax liability or you don't and you could end up paying out zero or - given the size of the potential risk involved - millions of pounds, thereby destroying the profit you may have made.
"Overlaying this, you have to think about legal and defence costs, which can also escalate into thousands of pounds. No company can afford to take the risk of financial ruin and that is why we're seeing a corresponding increase in the number of businesses taking out some form of taxation insurance.”
Separately, Aon said it is not uncommon for the possibility of a known adverse tax issue arising to block a deal, especially when the seller is not prepared to indemnify the buyer against an unfavourable outcome.
Taylor added: “There is no substitute for the buyer to conduct a rigorous M&A due diligence process, and no excuse for leaving any stone unturned. Building upon this, insurance can play an important part in the completion of a deal by ring fencing a known taxation risk that neither party can otherwise allocate between themselves.”
Neil Cooke, partner at law firm Barlow Lyde & Gilbert said: "We have witnessed an increasing volume of UK Claims under the tax warranties and the tax covenant, across a broad spectrum of transactions, over the past 7 years. We have also seen a marked increase in the size of the claims being pursued.
"It is difficult to identify any common causes or trends in terms of why and how the claims arise which emphasises the potential importance of insuring against the wide variety of tax liabilities that might materialise"
