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HMRC internal manual

General Insurance Manual

Taxation of general insurance: general rules

A company writing general insurance business, and trading in (rather than with) the UK, is subject to the normal rules governing the taxation of companies in the UK. An insurance company is therefore chargeable to tax in respect of its trade under the provisions of Case I of Schedule D on its annual profits or gains arising or accruing, by virtue of ICTA88/S18. Until the enactment of FA98/S42 (GIM4040), there was little statutory guidance on how annual profits are to be measured beyond ICTA88/S70, and this provides only that “for the purposes of corporation tax…income shall be computed under [Case I] of Schedule D on the full amount of the profits or gains”. Where reference is made here to ’trade profits’ it should be taken as referring to profits chargeable under Case I of Schedule D.

The lack of statutory guidance on computing the annual profits or gains of a trade led to a wealth of case law on the subject and as general insurers are taxed as ordinary traders many non-insurance cases are in point.

Of particular significance is the line of cases addressing the relationship between taxable and commercial profits, culminating in Threlfall v Jones and Gallagher v Jones 66TC77, Johnston v Britannia Airways 67TC99 and Herbert Smith v Honour 72TC130. These establish the principle that the full annual profits or gains are to be determined by the ordinary principles of commercial accounting, provided that there is no express statutory rule which requires otherwise.

The Business Income Manual considers the relationship between tax and accountancy BIM31000 onwards, and the general law relating to the allowance of provisions at BIM46510 onwards - but note that FRS12 does not apply to insurance contracts.