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HMRC internal manual

General Insurance Manual

Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: attribution of the investment return

Attributing investment yield, including income from and profits on disposal of investment assets, is difficult. For a non-EEA insurer Form 13 will disclose the assets the company has attributed to its UK branch, and Form 16 will disclose the investment return from those assets. But the question is whether there are circumstances in which more investment return than that disclosed in the FSA return (or which would be disclosed if the company made such a return) falls within ICTA88/S11 (whether or not by virtue of Article 7 of the OECD Model).

Insurance business is uniquely reliant on the confidence of the market in the financial strength and solvency of the insurer (see for example London and Liverpool and Globe v Bennett 6TC at pages 357-359). Much insurance business is written, or the market obliges it to be written, on the basis that the expected loss ratio will exceed 100%, meaning net claims and expenses will exceed net premiums. ABI statistics show that in none of the years 1990 to 2000 did general insurance carried on by its members make an overall underwriting profit. And the longer tail the business, the less this is a problem for the company because it will be able to invest the premium income it receives to build up a fund to meet the expected claims and to make a profit.

This is why the investment return of an insurer forms part of its trading income and so falls within ICTA88/S11. Even if some of it might be regarded as not actually trading income (perhaps because it has already suffered deduction of tax – see ICTA88/S393 (8)), it will fall within section 11 as income from property or rights used by the establishment. In the case of a non-EEA insurer the income disclosed on Form 16 would properly be regarded as falling within section 11.