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HMRC internal manual

General Insurance Manual

Taxation of general insurance: commencement and cessation


An insurance company will generally start trading some time after it receives its FSA permission. If it has been formed to trade with the public it will start to trade on the date on which it first holds itself out to potential customers as being open for business. But if it has been formed for a specific purpose, such as to reinsure, or to accept a transfer of an existing block of business, the date of commencement may coincide with the date on which the company first concludes a contract of insurance, or has the business transferred to it.

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The business of an insurance company is recognised in the Regulated Activities Order SI2001/544 as involving both the effecting and carrying out of contracts of insurance, so the principle that the trade ceases when the trader stops accepting new business (‘shuts up shop’) does not apply. The negotiation and settlement of claims is an integral part of the trade of insurance. Case law also supports this view - see for example Stewart v Oriental Fire and Marine Insurance Company Ltd Lloyd’s Law Reports [1984] vol.2 p.109 and Scher v Policyholders Protection Board [1993] All ER 407.

A company may therefore be treated as continuing to trade for so long as it maintains its business structure, continues to manage its portfolio of investments and negotiates and settles claims in the ordinary way. An insurer may apply to the FSA for a variation of its permission to carry on insurance business to remove the activity of effecting contracts of insurance from its permission, thus restricting its activities to carrying out insurance contracts to enable it to run off its remaining liabilities. This may be evidence of intention to cease trading at some future time, but is not, of itself, evidence of cessation. On the other hand the cancellation of an insurer’s permission will amount to a cessation. The FSA will not, however, cancel an insurer’s permission until all its insurance liabilities have been discharged. See SUP6 in the Supervision sourcebook within the FSA Handbook.

Reinsurance of the tail of the business will not, in itself, affect the status of the insurer as there is no privity of contract between the reinsurer and the original insured persons, and the insurer remains liable in full under the terms of the contracts entered into. However, the arrangement of such reinsurance - especially within a group - may coincide with, or be a preliminary to, the dismantling of the company’s business structure and the disposal of its investments and may signal true cessation.

The activities of a branch of an overseas insurer may be replaced by similar activities undertaken by a UK resident subsidiary but the branch may continue to run off existing business. In such circumstances, branch losses will normally continue to be available to the branch and cannot be transferred to the subsidiary under the provisions of ICTA88/S343 (see GIM4220).

GIM4210 deals with businesses in run-off.