A new form of insurance is being launched in the UK that protects individuals and companies against a tax investigation and compensates the tax liability.

Tax Liability Cover (TLC), is a joint venture between legal fees insurance provider Composite Legal Expenses and tax specialists, Qdos Consulting. The product is underwritten by NIG.

TLC will enable companies and individuals to additionally insure against losses due to tax demands. The cover will pay both interest and penalties resulting from a tax investigation.

Insurance brokers' clients can qualify for cover, following a review of their accounts and tax returns.

Depending on the size of business or income, the process may also include a “tax health check”.

This can be prepared in conjunction with the client's accountant by reviewing the audit report, or similar verification.

Once accepted for cover, the policyholder can select the areas of cover including tax, VAT and PAYE status enquiries, as well as “one-off” transactions such as the VAT treatment of property transactions.

John Mullin, managing director of Composite Legal Expenses, said: “By providing protection against an unexpected tax demand, in the form of compensation for the liability, TLC will simply replace and supersede traditional professional fee insurance.

“We estimate that its arrival will quadruple the current market, enabling brokers to convert many more businesses to professional fee and legal expenses insurance.”