CheckLists.Tax (beta)
N3. Insured event occurs
INCOME TAX: TRADING RECEIPT
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Insurance proceeds as a trading receipt: general
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- Trading receipt or not: what is the payment 'for'?
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General rule
- Receipt of an insurance payout raises the same issues as receipt of compensation, namely:
(1) Whether the receipt is a receipt of the trade?
(2) If so, is it capital or income?
- Note the distinction drawn there between what the payment is 'for' and how it is calculated. See N5. Compensation received.
- Nevertheless, an insurance payout is likely to be more explicitly 'for' a particular loss.
- E.g. In British Columbia Fir the plant and premises of a lumber manufacturer were destroyed by fire. The insurance policy insured them against loss of net profits. even though capital assets were completely destroyed, the payment was 'for' the lost profit.
Relevance of deductibility of premiums
- The tax status of the insurance payout does not depend on whether the premiums for the insurance were deductible (BIM40751; BIM45525).
- Albeit, in British Columbia Fir, UKPC considered it relevant that the insurance receipt was the product of a revenue payment.
- HMRC say, in relation to key person insurance, that "as a general rule" if the conditions for deducting premiums are not met, receipts under that policy are not taxed as trading income (BIM45525).​​
- Nevertheless, they warn: "However, whether particular receipts are part of trading income is a separate matter of law to the deductibility of expenditure. No assurance can be given that any future receipt will be excluded from trading income even though the premiums are not allowable..."
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Insurance policy inseparably connected to the business
- In British Columbia Fir, UKPC applied a test based on whether the insurance policy was inseparably connected with ownership and conduct of the business:
- "Finally, the receipt was one of which, as their Lordships think, it can be fairly said that it arose from the business of the respondents. The two English cases of Newcastle Breweries, Ltd v Inland Revenue Comm (1) and J Gliksten & Son, Ltd v Green (2) are authorities for this proposition. This receipt was inseparably connected with the ownership and conduct of the respondents' business. Had the respondents not been insured under their main fire policies, these particular use and occupancy policies would not have been available to them."
- Not relevant that the profit may be considered 'unearned': "it was an ordinary receipt in the sense, not that it would occur every year or regularly at stated intervals, but in the sense that in the case of a business prudently conducted it would ordinarily be received so often as the risk insured against materialised" (British Columbia Fir).
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Legislation:
Cases:
R v. British Columbia Fir and Cedar Lumber Co Ltd [1932] AC 441;
HMRC manuals: BIM40751;
Commentary:
See also:
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- Personal insurance policies v. policies taken out as part of the business
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- Alternatively, Deeny appears to support a distinction between personal insurance policies covering losses actually suffered and policies taken out as part of the business to compensate for profits that may be lost or losses that may be suffered. Personal policies compensating the owner for loss suffered in the business do not give rise to trading receipts, whereas business policies do (see 307).
- See Personal stop loss insurance, below.
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Legislation:
Cases: Deeny v. Gooda Walker Ltd [1996] STC 299;
HMRC manuals:
Commentary:
See also:
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- Insurance payout in respect of a loss/expense that was deducted in calculating profits (trading receipt even if capital)
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General rule
​- Payment to compensate for revenue expense is normally revenue.
- E.g. compensation to pay employee whilst unfit to work: "If in the case of an employee who is unable to attend to his employment by reason of injuries received in the manner described in the policy, the Company continue to pay his wages, the wages so paid would be treated as a trading expense. The sum received to compensate them for the payment of those wages, as it appears to me, could not, by any process of reasoning, be regarded as a payment on capital account, or a payment in the nature of capital." (Gray & Co at 230).
- Nevertheless, it seems possible that insurance proceeds might satisfy the test to be a trading receipt in circumstances where the expense that it indemnifies against is not deductible because it does not satisfy the stringent 'wholly and exclusively' test (which only applies to expenses).
- Query whether the accounting treatment requires two entries in the profit and loss (a receipt and an expense) or simply the net result.
- Note a similar possibility in relation to whether premiums for insurance are deductible and whether proceeds are taxable (see above and BIM45525).
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Capital sums reimbursing deductible damage deemed to be trading receipts
- Where a fixed asset is damaged, the insurance receipt may be capital but the cost of repair may be revenue and deductible (BIM40755).
- To avoid a mismatch (insurance receipt not taxable, but cost of making good deductible) there is a deeming rule.
- But only up to the amount of the deduction.
- Where (ITTOIA s.106; CTA 2009, s.103):
(1) a deduction is allowed for a loss of expense in calculating the profits of a trade;
(2) a person carrying on the trade recovers a sum under an insurance contract/contract of indemnity in respect of the loss/expense;
(3) The sum is not of a revenue nature;
Then: the sum is to be brought into account as a trading receipt, up to the amount of the deduction.
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Post-cessation insurance receipt
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Legislation:
Cases: Gray & Co Ltd v. Murphy (1940) 23 TC 225;
HMRC manuals: BIM40755;
Commentary:
See also:
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Liability related insurance
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- Liability and negligence insurance
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Professional negligence
- Damages for professional negligence are deductible, but the receipt of an indemnity under an insurance policy is a trading receipt (BIM45515).
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Legislation:
Cases:
HMRC manuals: BIM45515;
Commentary:
See also:
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Health and person related insurance
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- Owner health: loss of profit (not trading receipts)
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- Premiums on a policy to protect against the risk of death, illness, injury etc. to owner or partner are not deductible.
- But, correspondingly, a payment under the policy in respect of such an event is not a trading receipt.
- This appears consistent with the Deeny distinction between personal stop-loss policies and business policies.
- Such benefits are generally tax free (BIM45560).
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Legislation:
Cases:
HMRC manuals: BIM45560;
Commentary:
See also:
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- Owner health: insurance against cost of hiring a stand-in for owner/other fixed costs (taxable)
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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).
- Correspondingly, recoveries under the policy are taxable received because they reimburse deductible expenditure (BIM45565).
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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).
- Logically, a similar difference in treatment should apply to recoveries.
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Legislation:
Cases:
HMRC manuals: BIM45565;
Commentary:
See also:
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- Employee/director unavailability/death insurance
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Temporary unavailability
- Payment to compensate company for temporary unavailability of employee is a revenue receipt (in the same way that salary paid during that period is deductible) - discussed in Gray & Co.
- "If the company takes out a policy for a sum 'which the directors estimate will fairly represent the loss or part of the loss-it matters not - which they will suffer if they are deprived of those services, can it be said that the £50 a week, or whatever the figure may be, that the company receives under such a policy is anything but a revenue receipt? It seems to me that the insurance moneys received to cover the company against the revenue loss which it suffers by being deprived of those services are receipts on revenue account and nothing else." (Williams's Executors at 36)
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Permanent unavailability/death
- The same applies to payment to compensate company for permanent unavailability (Gray & Co - insurance payment was a revenue trading receipt).
​- Williams's Executors - directors of a company took out insurance policies on their life for the benefit of the company and with the premiums paid by the company. One director died and a payment of £15,000 was made to the company.
- Held: that was a revenue trading receipt for the company.
- "The important matter is the object of the insurance, which may or may not be entirely achieved according to the accuracy of the estimate made. What would be the position if after taking out that policy the employee happened to die, with the result that the company was deprived of those benefits on revenue account which it would have received if it had continued to enjoy his services? There is no magic here in, the distinction between, a lump sum and a periodical sum." (at 36).
- Compared with the situation of paying to get rid of an onerous employee, which would be a revenue expense.
- Keir & Cawder Ltd - compensation received by a company in respect of the death of a key individual with whom the company was associated was a revenue receipt to compensate for the loss of profits resulting from the loss of that individual's services. ​​
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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.
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Legislation:
Cases:
Thomas Merthyr Colliery Company Ltd v. Davis [1933] 1 KB 349 (CoA);
Gray & Co Ltd v. Murphy (1940) 23 TC 225;
CIR v. Williams's Executors (1944) 26 TC 23;
Morgan v. Tate & Lyle Ltd [1955] AC 21 (HoL);
HMRC manuals:
Commentary:
See also:
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- Loss of key business partner
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- Keir & Cawder Ltd - insurance proceeds received by a company in respect of the death of a key individual, who had an international reputation and with whom the company was associated through an agreement, was a revenue receipt to compensate for the loss of profits resulting from the loss of that individual's services.
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Legislation:
Cases: Keir & Cawder Ltd v. CIR (1958) 38 TC 23 (Court of Session);
HMRC manuals:
Commentary:
See also:
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Property related
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- Loss/damage to capital asset
- British Columbia Fir - T, a lumber merchant, had two types of policy:
(1) Annual policies covering loss and damage by fire.
(2) Use and occupation insurance covering further loss or damage sustained in the event of their plant being shut down in consequences of fire, specifically loss of net profit.
- T's plant and premises were destroyed by fire.
- It was accepted that the loss payable under the main, annual policies were capital. See below on the use and occupancy insurance.
​​- HMRC say: "A sum received under a policy insuring a fixed asset against damage or loss is a capital receipt. However, any expenditure incurred in making good the damage or loss by repair, renewal or by replacement may be an allowable deduction." (BIM40755).
- There is a statutory rule requiring capital insurance receipts in respect of loss or expense that is deductible to be brought into account, up to the amount of the deduction (ITTOIA s.106; CTA 2009, s.103).
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Legislation: ITTOIA s.106; CTA 2009, s.103;
Cases:
R v. British Columbia Fir and Cedar Lumber Co Ltd [1932] AC 441;
CIR v. Williams's Executors (1944) 26 TC 23;
HMRC manuals:
Commentary:
See also:
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- ​Loss/damage to trading stock
- Insurance proceeds following the destruction of/damage to trading stock is a revenue trading receipt (BIM40751).
- "This particular timber was turned into money, not because it was sold, but because it was burned and they had an insurance policy over it. The whole question comes to be whether that is a turnover in the ordinary course of their business. I think it was." (J Gilksten at 384).
- "Not merely are the profits derived from the sale of goods in which a person trades of a revenue character, but insurance monies received in respect of the loss of trade goods are proper receipts to appear in a revenue account. If a company insures its stock of goods against fire and that stock is destroyed by fire, however great and valuable it may be, the receipts must be treated in exactly the same manner as receipts from a sale of the goods would have been 'treated. The trader, it 'is true, as has been said, does not trade in fires but in goods, but if he disposes of the whole of his stock by sale or if the whole of his stock is destroyed by fire and the insurance money is received, there can be no ground for differentiating for tax purposes between the purchase money and the insurance money." (Williams's Executors at 35).
- This is so, even if the insurance proceeds exceed the current carrying value of the trading stock and irrespective of whether the money is spent replacing the trading stock (as in ​J Gliksten).
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Legislation:
Cases:
Green v J Gliksten & Son Ltd (1929) 14 TC 364;
CIR v. Williams's Executors (1944) 26 TC 23;
HMRC manuals: BIM40751;
Commentary:
See also:
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- Use and occupancy insurance
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- British Columbia Fir - T, a lumber merchant, had two types of policy:
(1) Annual policies covering loss and damage by fire.
(2) Use and occupation insurance covering further loss or damage sustained in the event of their plant being shut down in consequences of fire, specifically loss of net profit.
- T's plant and premises were destroyed by fire.
- Although the payment under the annual policies was agreed to be capital, the payment under the use and occupation policy was a revenue trading receipt.
- "This insurance receipt, therefore, was the product of a revenue payment prudently made by the respondents to secure that the gains which might have been expected to accrue to them had there been no fire should not be lost, but should be replaced by a sum equivalent to their estimated amount."
- In Williams's Executors, commenting on British Columbia Fir: "A manufacturer can, of course, insure his factory' against fire. The receipts from that insurance will obviously be capital. receipts. But supposing he goes further, as the manufacturer did in that case, and insures himself against the loss of profits which he will suffer while his factory is out of action; it seems to me it is beyond question that sums received in respect of that insurance. against loss of profits must be of a revenue nature."​
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Legislation:
Cases:
R v. British Columbia Fir and Cedar Lumber Co Ltd [1932] AC 441;
Williams's Executors v. CIR (1944) 26 TC 23;
HMRC manuals:
Commentary:
See also:
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Other losses
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- Insurance against late delivery under a contract
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​- Crabb v. Blue Star Line Ltd - T had an insurance policy entitling it to £500 for each day's delay in a shipbuilder delivering the new ships it ordered. It was common for T's shipbuilding contracts to provide for the purchase price to be increased in the event of early delivery and decreased in the event of late delivery, albeit that was not the case here.
- Held: the insurance sums were capital. They were not compensation for loss of profit or quantified by reference to profit. Instead, late delivery meant that the ship-builder's services were less valuable than had been contracted for.
- Equivalent to a reduction in purchase price for late delivery, which would be impossible to regard as a revenue receipt.
- No guarantee the ships would be used in T's business to produce profit (as indicated by fact that insurance not linked to lost profit).
- Burmah Steam Ship distinguished on the basis that (i) sum not calculated by reference to lost profit; and (ii) in that case, unlike the present case, T already owned the asset, whereas this was a contract to acquire an asset.
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Legislation:
Cases:
Burmah Steam Ship Company Limited v. CIR (1930) 16 TC 67;
Crabb v. Blue Star Line Ltd (1961) 39 TC 482;
HMRC manuals:
Commentary:
See also:
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- Business interruption insurance
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Proceeds of insurance against risk of event causing loss of profit for temporary period are trading receipts
- Mallandain Investments Ltd: T, who produced novelty items, insured against the risk of the coronation of King Edward VIII not happening and received a payout of £5,000. It was held that the payout was a trading receipt.
- HMRC allow deduction of premiums on such policies on the basis that receipts will be taxable (BIM45510).
- See also: Property: use and occupancy insurance, above.
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Legislation:
Cases: Mallandain Investments Ltd v. Shadbolt (1940) 23 TC 367;
HMRC manuals: BIM45510;
Commentary:
See also:
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- Personal stop-loss insurance
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- Deeny appears to accept that receipts under a 'personal' stop loss insurance policy are not trading receipts.
- "I think that if, as appears to be the case, personal stop-loss is a contract to indemnify the name against a part of the overall losses arising in a given underwriting year from his underwriting business at Lloyd's, then a payment under such a policy cannot itself be a receipt of the business. It is a payment under a contract independent of the business which depends for its calculation upon the prior computation of all the receipts and expenses of the business. To treat the stop-loss recovery as a receipt of the business would therefore involve a circularity. This appears to have been the view of the Revenue, which until 1973 did not allow the premiums for personal stop-loss policies as expenses of the underwriting business and did not tax the proceeds as receipts. The Finance Act 1973 reversed these rules by special provisions which are now in s 178 of the 1993 Act." (Deeny at 307)
- Appears to be drawing a distinction between 'personal' insurance policies and insurance policies taken out 'as part of his business'.​
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Legislation:
Cases:
Deeny v. Gooda Walker Ltd [1996] STC 299;
HMRC manuals:
Commentary:
See also:
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INCOME TAX: CHARGEABLE EVENT GAINS
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Policies covered
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- Life insurance/annuities, capital redemption policies, but not accident policies with no investment content
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General rule
- The chargeable event gain legislation applies to (ITTOIA s.473):
(1) Life insurance policies.
(2) Life annuity contracts.
(3) Capital redemption policies.
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Accident policy with no investment content excluded
- HMRC say that an accidence policy is excluded where it (SP 6/92):
(a) affords protection against the risk of dying only if death is as a result of an accident;
(b) has no investment content;
(c) does not acquire a surrender value (other than equal to a proportion of the premiums being refundable).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also: SP 6/92;
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INCOME TAX: OTHER
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- Annual payments under own-health policies (exemption)
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Legislation: ITTOIA s.735;
Cases:
HMRC manuals:
Commentary:
See also:
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EMPLOYMENT INCOME TAX
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Employee liability covered by insurance payout
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- Employer paid for insurance for employee
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Insurance is a benefit in kind
- If an employer pays for insurance that covers/protects the employee against liabilities/potential liabilities and associated expenses, that insurance is a benefit in kind to the employee.
- "Similarly, 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). The measure of the charge is the proper proportion’ (see EIM21200) of the premium: that is, that proportion of the overall premium that is attributable to the cover provided for that director or employee." (EIM30501).
- The payout itself is not a further employment benefit to the employee (but the result of the earlier benefit).
- The insurance payout is not a trading receipt for the employer (as it belongs to the employee).
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Legislation:
Cases:
HMRC manuals: EIM30501 - Deductions: directors' and officers' liabilities: general;
Commentary:
See also:
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- Employer paid for insurance in its own name, reimbursed employee
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- If the insurance is in the employer's own name, with no right arising to the employee, there is no benefit in kind to the employee by virtue of the policy.
- If an insured liability arises and the employer reimburses the employee:
(1) The insurance proceeds are likely a trading receipt for the employer.
(2) The reimbursement to the employee is employment income of the employee.
(3) The employer should get a deduction for the employment income.
(4) The employee may be entitled to a deduction under ITEPA 2003, s.346.
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Legislation: ITEPA 2003, s.346;
Cases:
HMRC manuals:
Commentary:
See also:
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