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Post lockdown, what is the tax position on insurance claims for Business Interruption?

By 30th July 2020

If you had the foresight to include a Business Interruption clause in your corporate insurance policy then you will no doubt have been in touch with your insurer now lockdown has lifted. Assuming that your policy does cover you, (which, regrettably, is not guaranteed even if there is a provision for interruption, as an event such as a pandemic may have been excluded), the next question you need to consider is what tax treatment you make for such a pay out?

Answer is not straightforward

The answer is not straightforward, as is evident from this extract from HMRC’s Business Income Manual 45500: In most situations, if the insurance premiums are allowable deductions from trading profits, the receipts from the policy are taxable as trading income. 

In a vast number of cases, the fact is receipt of an insurance payout will be considered as a benefit for the business, which means you’ll have previously deducted the cost of the premiums as an allowable expense, but this means the default tax position is that any proceeds you now receive will be treated as taxable income.

Probably not the situation you anticipated.

The inescapable truth is that post-lockdown, you will need to consider how a payout will be treated in your return for the current tax year, to ensure you declare the correct amount of tax. You may want to rely on every penny to help your business resume, but while HMRC might be willing to discuss variations in payment terms given the exceptional circumstances, you should not expect this when planning your cash flow for the remainder of the current trading year: and it would be truly exceptional for HMRC to consider any leeway on payment terms if your initial return was found to have treated any payout in an inappropriate manner.

In short, and hard as it might seem, under UK Generally Accepted Accounting Principles (GAAP) the recognition of the insurance receipt might even have to be made in accounts submitted prior to your final receipt of the actual funds. So it is best to prepare now and plan appropriately.

For ‘business interruption’, your policy might include specific clauses relating to:

  • The premises
  • Stock held on the premises
  • Assets held at the premises
  • Turnover

The actual tax treatment, therefore, depends on the precise wording of your policy, and whether any insurance receipt will be deemed as revenue or capital. Receipts to compensate you for a loss of stock, or a ‘hole’ in your commercial profits that has arisen through either a loss of sales or additional costs due to COVID-19, will probably be treated as a revenue payment.

But an insurance payment that covers you for the loss of a fixed asset will be deemed to be capital.

In the second scenario, if you incur an expense to repair or replace an asset that relates to an allowable deduction then a portion of the sum received from the insurance policy must be included as a receipt when calculating your taxable profit: up to the amount of the deduction received.

In short, the detail of every individual claim needs to be examined, as policy terms will vary from one provider to another. So professional advice is needed to determine the correct tax treatment. 

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