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HMRC internal manual

General Insurance Manual

Taxation of general insurance: annual accounting: acquisition costs and administrative expenses

Acquisition costs are defined in note 6 to the Profit and Loss Account Format in the accounting Regulation SI2008/410 as the costs arising from the conclusion of insurance contracts, including

  • direct costs, such as acquisition commissions or the costs of drawing up the insurance document or including the insurance contract in the portfolio, and
  • indirect costs such as advertising costs or the administrative expenses connected with the processing of proposals or the issuing of policies.

The Regulations distinguish acquisition costs from administrative expenses, which include the costs of premium collection, portfolio administration, and rebates, and inward and outward reinsurance. In particular, administrative expenses include staff costs and depreciation not otherwise shown under acquisition costs, claims incurred or investment charges.

Deferral of acquisition costs follows the accounting treatment, which is discussed at GIM2130. Broadly, general business deferred acquisition costs are amortised over the period over which the related premiums are earned. The ABI SORP of December 2005 gives more details at paragraphs 132 to 135. Advertising costs are not deferred unless they relate directly to the acquisition of new business. Accountancy advice should be sought before queries are raised concerning the accounting treatment of acquisition costs.

The balance of deferred acquisition expenses is treated as a money debt, so related exchange gains and losses fall within the loan relationships legislation (FA96/S100 (10)(b)).

Claims handling expenses are considered in relation to provisions at GIM6130.