CheckLists.Tax (beta)
P2. Purchase of insurance
GENERAL
- Types of insurance
- HMRC describe various kinds of health and employment related insurance policies at IPTM6105.
Friendly society contracts
- HMRC include these contracts within their reference to policies (IPTM6105).
Legislation:
Cases:
HMRC manuals: IPTM6105 - Sickness disability and unemployment insurance: types of policies;
Commentary:
See also:
- No insurance against fines or penalties for criminal acts
- "Company directors and officers (and, to a lesser extent, employees) may be subject to legal action undertaken by their employers or by third parties in respect of alleged or actual wrongful acts or omissions in their capacities as directors or employees. Insurance (usually called indemnity insurance) to cover damages and legal expenses arising from such claims is available but it cannot extend to fines or penalties for criminal acts." (EIM30501).
Legislation:
Cases:
HMRC manuals: EIM30501 - Deductions: directors' and officers' liabilities: general;
Commentary:
See also:
INCOME TAX: TRADING DEDUCTION
General
- Insurance premium tax deductible if premium deductible
- If the premium is deductible, so is the insurance premium tax (BIM45595).
Legislation:
Cases:
HMRC manuals: BIM45595;
Commentary:
See also:
- Self-insurance and mutual insurance
Self-insurance
- Sums set aside by a trader to be used to form its own insurance fund are not insurance premiums (they are a reserve).
- If a specific liability is being provided for, deduction may be permitted (depending on the circumstances).
- No deduction if it is to provide for payments to the owner/partners in the event of death/illness etc (BIM45560).
Mutual insurance
- Payments to mutual concerns are deductible in the same way as other insurance premiums would be (BIM45590; Richard Evans and Co).
Legislation:
Cases: Thomas v Richard Evans and Co Ltd (1927) 11 TC 790 (CoA);
HMRC manuals: BIM45560; BIM45590;
Commentary:
See also:
- Purchasing/paying for insurance for another person
Allowed where T's purpose was to keep an essential customer going
- Usher's Wiltshire Brewery: T, a brewery company, leased properties to tied tenants at reduced rents. T voluntarily incurred various expenses, including insurance premiums, for the purpose of keeping the tied houses in condition to earn a profit by selling the goods supplied by T. Some of the expenses were ones that the tenant's were obliged to incur under the leases.
- Held: payments were deductible.
- "It was held [in Lion Brewery Co's case] to be a proper debit in estimating the balance of profits of the brewery business, because it was paid to keep going another business the success of which was essential to their own." (at 444)
- HMRC accept the deductibility of premiums on policies taken out "wholly and exclusively for the benefit of customers" (BIM45575).
Employer purchasing for employees
- Premiums paid by the employer on a policy "to indemnify employees against legal action taken against them personally for actions in the course of the employment are allowable as a deduction" (BIM45520).
Legislation:
Cases:
Smith v. Lion Brewery Co Ltd [1911] AC 150 (HoL);
Usher's Wiltshire Brewery Limited v. Bruce [1915] AC 433 (HoL);
HMRC manuals: BIM45520; BIM45575
Commentary:
See also:
Death and health related policies
- Key person insurance policies (potentially deductible)
Deductible where sole purpose/benefit is insuring loss of trading income
- Insurance premiums on policy protecting against loss resulting from death, illness, injury of employee/director are deductible where (BIM45525):
(1) Sole purpose of insurance is meeting a loss of trading income that may result (not capital losses).
(2) Cover is only against the risk of death, illness etc. during the term of the policy, with no other benefits.
(3) The term of the insurance is not longer than the expected usefulness of the employee/director to the business.
Not deductible where one purpose is private advantage to the controlling directors who authorise it
- Samuel Dracup & Sons Ltd v. Dakin - endowment policies taken out to provide pension to the controlling directors of a company had a private advantage purpose for the directors who decided that the company should take them out.
- Beauty Consultants Ltd: T, a company, paid premiums on policies that paid in the event of death of directors. The directors were also shareholders. It was found that one purpose was to benefit the trade (as it would have funds that could be used to pay a manager to replace the deceased), but the directors also had an unconscious purpose of improving the value of their shares.
- "Accepting that the directors' purpose includes the inevitable consequences of the payment there is a dual purpose and so the expenditure is not allowable."
- Query whether this is correct in light of the case law on purpose.
- HMRC say that indicators premiums are not deductible include (BIM45530):
(1) The policy is in respect of directors who are major shareholders, but not other employees.
(2) Benefits under the policy exceed sick pay arrangements typically offered to employees of equivalent status in similar businesses.
(3) Death of the director would significantly affect the value of their shares.
Policy taken out as a condition of the provision of finance
- Costs of taking out the policy are incidental costs and deductible under ITTOIA s.58.
- Premiums on the policy are not incidental costs (BIM45525).
Apportionment
- If there is a non-business purpose in respect of some within an 'insured' group of individuals, but not others, HMRC accept a reasonable apportionment (BIM45530).
Legislation:
Cases:
Samuel Dracup & Sons Ltd v. Dakin (1957) 37 TC 377;
Beauty Consultants Ltd v. Inspector of Taxes [2002] STC (SCD) 352, Judge Avery Jones;
HMRC manuals: BIM45525; BIM45530;
Commentary:
See also:
- Owner health policies: loss of profit (no deduction)
- Premiums on insurance covering the death, illness or injury of the proprietor of the business or a partner in a partnership are not deductible because they relate, at least in part, to the personal financial position of the owner/partner (BIM45560).
- Correspondingly, the receipts on such policies are not trading income and generally not taxed.
Legislation:
Cases:
HMRC manuals: BIM45560;
Commentary:
See also:
- Owner health: insurance against cost of hiring a stand-in for owner/other fixed costs (deductible)
General position
- Where the policy covers business costs in the event of the illness of the business owner, such as hiring a locum or other fixed costs, the premiums are deductible (BIM45565).
Policies with a personal element
- If the policy also insures against personal costs, such as medical treatment, HMRC allow apportionment and deduction of the "proportion of the premium that relates to practice expenses cover" (BIM45565).
- On the possibility of apportionment HMRC refer to BIM42115.
Legislation:
Cases:
HMRC manuals: BIM45565;
Commentary:
See also:
Asset insurance
- Damage to or loss of use of assets
Cost of repair/replacement
- HMRC accept the deduction of premiums on insurance against the risk of damage to or loss of fixed assets, including intangible assets, where whollly and exclusively for the purposes of the trade (BIM45501).
- Not treated as capital even if the policy provides 'new for old' cover.
- The same applies to insurance for trading stock (BIM45505).
Loss of profit
- Premiums on insurance against the risk of lost profit due to damage to fixed assets, e.g. business premises, or loss of use of income-producing assets (e.g. plant and machinery) are generally deductible (BIM45510).
Legislation:
Cases:
HMRC manuals: BIM45501; BIM45505; BIM45510;
Commentary:
See also:
Legal liability and cost related
- Employee liability insurance (usually deductible)
- Premiums on insurance to cover the risk of having to pay compensation to employees are usually allowable (BIM45525).
Legislation:
Cases:
HMRC manuals: BIM45525;
Commentary:
See also:
- Professional negligence (deductible)
- Premiums on an indemnity policy for professional negligence are deductible (BIM45515).
Legislation:
Cases:
HMRC manuals: BIM45515;
Commentary:
See also:
- Employer purchasing insurance to protect employees being sued personally
- Premiums paid by the employer on a policy "to indemnify employees against legal action taken against them personally for actions in the course of the employment are allowable as a deduction" (BIM45520).
Legislation:
Cases:
HMRC manuals: BIM45520;
Commentary:
See also:
Loss of profit insurance
- Business interruption
- Premium insuring against the risk of interruption of supplies needed to carry on the business are allowable (BIM45505).
- HMRC also accept the deduction of premiums insuring against the risk of events causing loss of profit for a temporary period, citing the case of Mallandain Investments Ltd.
- In that case, T, who produced novelty items, insured against the risk of the coronation of King Edward VIII not happening and received a payour of £5,000. It was held that the payout was a trading receipt.
- Specific deduction permitted for payments to export credits guarantee department (ITTOIA s.91; CTA 2009, s.91; BIM45580).
Legislation: ITTOIA s.91; CTA 2009, s.91
Cases: Mallandain Investments Ltd v. Shadbolt (1940) 23 TC 367;
HMRC manuals: BIM45510; BIM45580;
Commentary:
See also:
- Trade debt insurance
- Premium insuring against the risk of default on trade debts are allowable (BIM45505).
Legislation:
Cases:
HMRC manuals: BIM45505;
Commentary:
See also:
- Strike insurance
Insurance against risk of loss due to strike
- It was held in Thomas Merthyr Colliery Company Ltd v. Davis that insurance premiums against the risk of loss by reason of strike was not deductible because "they do not...enure to secure a profit of the trade as being carried on, but to supply a deficiency at a time when there is no trade being carried on".
- That appears inconsistent with the treatment of such sums as trading receipts and was doubted by Lord Reid in Morgan.
Legislation:
Cases:
Thomas Merthyr Colliery Company Ltd v. Davis [1933] 1 KB 349 (CoA);
Morgan v. Tate & Lyle Ltd [1955] AC 21 (HoL);
HMRC manuals:
Commentary:
See also:
EMPLOYMENT TAX
Employer purchases insurance for employee/former employee
- Insurance is benefit in kind (subject to sick pay exclusion)
Benefit in kind
- If the insurance policy is for the employer's own benefit, to cover its own liability to make payments, that is not a benefit to the employee.
- If the insurance policy will pay directly to the employee, the insurance is a benefit to the employee.
- "where an employer arranges and pays for insurance to cover potential liabilities arising to directors or employees from alleged or actual wrongful acts or omissions in their capacities as such, charges under Chapter 10 of the benefits code (see EIM20007) arise in respect of the benefit of the insurance cover (see EIM21001 onwards)." (EIM30501).
Sick pay exclusion
- A benefit consisting of the right to receive or the prospect of receiving sums that would be treated as earnings under s.221 is an excluded benefit (ITEPA s.202(1)).
- Unless the benefit is provided under salary sacrifice (see s.202(1A) and EIM06471).
- Section 221 applies to payments where an employee is absent from work due to sickness or disability where the payment is made by reason of employment or as a result of arrangement (e.g. insurance) entered into by the employer.
- Only applies to the extent that contributions were made by the employer rather than employees (s.221(4)).
- HMRC distinguish such arrangements from permanent health insurance at EIM06410.
Legislation: ITEPA 2003, s.202; s.221;
Cases:
HMRC manuals:
EIM21820 - Particular benefits: sick pay schemes;
EIM30501 - Deductions: directors' and officers' liabilities: general;
Commentary: Simons Taxes E4.1211;
See also:
- Employer paid life insurance and retirement policies
- There is an exemption from the benefits code in respect of provision made by an employer for a retirement or death benefit (ITEPA s.307).
Legislation: ITEPA s.307;
Cases:
HMRC manuals:
Commentary: Simons Taxes E4.1211;
See also:
- Insurance for legal liabilities/expenses related to performing employment (potential relief)
Relief by deduction from earnings
- A deduction from earnings may be made for the premiums on a qualifying insurance contract to the extent that the premium relates to indemnification for (ITEPA s.346) in essence:
(1) A liability related to the employment.
(2) Costs and expenses incurred in connection with a claim related to the employment.
(3) Costs and expenses incurred in connection with giving evidence about a matter related to the employment.
(4) Costs and expensed incurred in connection with proceedings/investigations (including criminal proceedings) in which acts to the employee or other matters related to the employee are being or are likely to be considered.
- The deduction is given for the insurance against the employee risk.
- More than one employee covered - apportion (s.346(3)(b); EIM30519).
- Employer risk of having to indemnify employee covered - apportion, but note:
- "In practice, however, since the deduction will simply cancel out the charge under Chapter 10 of the benefits code (see EIM20007) to which the employee would otherwise be subject because of the provision by the employer of the benefit of insurance cover, nothing is likely to turn on the apportionment." (EIM30519).
- Exclusion for tax avoidance arrangements.
- Qualifying insurance contract - see ITEPA s.349 and EIM30513.
- Limited to the risks identified in the legislation.
- No other benefits.
- No cover for more than two years (save by renewal).
- Renewal cannot be compulsory.
- Not connected with any other contract (this is anti-avoidance to prevent value shifting between contracts - EIM30517).
Termination of employment
- Exclusion for similar types of expense/liability from the charge on termination of employment (ITEPA s.409).
Former employee costs/liability
- Potential deduction for similar types of expense/liability under ITEPA s.555 - 564.
- See EIM30530.
- Limited to 6 tax-years post-employment (EIM30534).
- Excess of deduction over total income for the year is treated as a capital gains loss (EIM30532).
NICs
- Where the employer arranges cover or reimburses the employee for premiums of a policy qualifying under s.346, no Class 1 NICs liability arises (NIM05665).
- Query where the exemption from Class 1A NICs is - see NIM14000.
Legislation: ITEPA s.346 - 350; s.409; s.555 - 564;
Cases:
HMRC manuals:
EIM30501 - Deductions: directors' and officers' liabilities: general;
EIM30511 - qualifying liabilities;
EIM30530 - relief for ex-employees;
EIM30532 - relief for "excess" liabilities;
NIM05665 - Class 1 NICs: Expenses and allowances: Employee liability insurance;
NIM14000 - Class 1A National Insurance contributions: Exemptions from Class 1A NICs: Contents;
Commentary:
See also:
- Insurance against cost of overseas medical treatment (exemption)
- Exemption for providing employee with insurance against cost of providing medical treatment whilst outside the UK where the need for it arsies whilst employee is outside the UK for the purpose of performing the duties of the employment (ITEPA 2003, s.325).
Legislation: ITEPA 2003, s.325;
Cases:
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
Deductions
- Non-deductibility of premiums
- No deduction in the computation of gains of any premiums or payments under a policy of insurance against the risk of damage etc. to that asset (s.205).
- Cost of insurance policy taken out as a condition of beneficiary acquiring full title to an asset not deductible in Murray as not consideration for acquisition of the interest and not an expense of establishing title.
Legislation: TCGA 1992, s.205.
Cases: Allison v. Murray [1975] STC 524;
HMRC manuals:
Commentary:
See also:
INHERITANCE TAX
Transfer of value
- Payment of insurance premiums on policy for the benefit of another
- Payment of insurance policy premiums on a policy for the benefit of another is, prima facie, a transfer of value to that other person.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
- Back to back policies
General
- Person deemed to have made a disposition where they take out back to back policies.
- Unless they can show that the purchase of the annuity and insurance were not associated operations.
- On the meaning of associated operations see C1. Gifts (general).
- See also Smith (annuity purchased in conjunction with life policy, associated operations).
Normal payments out of income
- Exemption for normal expenditure out of income does not apply to premiums on back to back policies unless annuity and insurance were not associated operations (s.21(2)).
Legislation: IHTA s.21; s.263;
Cases:
Smith v. HMRC [2007] EWHC 2304 (Ch);
HMRC manuals:
IHTM14830 - Lifetime transfers: associated operations: insurance policies;
Commentary:
See also:
Gift with reservation of benefit
- Benefits to donee of life insurance policy linked to benefits to donor: deemed gift with a reservation of benefit
- If there is a gift of a life insurance policy (on the donor's/spouse's lives) and the benefits to the donee will or may vary by reference to the benefits accruing to the donor or spouse (or civil partner) under that policy or another policy, the gift is subject to a reservation of benefit (Sch 20, para 7).
- Concerned with benefits under an insurance policy not benefits under a trust (IHTM14453). This can be important because para 7 is triggered by benefits to the spouse whereas the general GWR rules are not.
- Not concerned with benefits that vary other than by reference to benefits accruing to the donor (e.g. benefits varying according to survival) (IHTM14453, example 3).
Legislation: FA 1986, Sch 20, para 7;
Cases:
HMRC manuals: IHTM14453;
Commentary: McCutcheon 7-111.
See also: