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HMRC internal manual

General Insurance Manual

Mutual insurance: tax treatment

General insurance activities undertaken on a mutual basis, namely such activities that give rise to the underwriting profit or loss, do not give rise to any taxable profit or loss. Mutual insurance is therefore an exception to the rule that the profit of general insurance business is assessed as trading income (see GIM4030).

Mutual general insurers are charged to tax only on investment income and chargeable gains and any underwriting losses may not be set against them. For accounting periods beginning after 31 March 2004 a mutual insurer, though not an ‘investment company’, will be a ‘company with investment business’ entitled to set expenses of management within ICTA88/S75 against total profits. For earlier accounting periods a mutual insurer was not an investment company within the meaning of ICTA88/S130 because its business consists of writing insurance and making investments, which is not ‘wholly or mainly the making of investments’. Where management expenses are deductible, they will by virtue of ICTA88/S75 (4)(a) be restricted to expenses referable to that part of the company’s business which consists in the making of investments - see CTM08040 

Subject where applicable to a deduction for management expenses, investment income is liable to corporation tax in full, and gains and losses on the realisation of investments and other assets are calculated and charged according to the chargeable gains rules. The investment income and gains are derived from transactions with financial concerns and others who are outside the circle of mutuality (GIM9010) and consequently mutual principles do not apply to them.

If gains on the investments held by a mutual general insurance company have been brought into account as trading receipts, rather than as chargeable gains, and calculated according to generally accepted accounting principles, this treatment will be followed, and all relevant tax provisions, such as FA02/S64 to FA02/S66 and FA02/SCH22 (see GIM5190), applied. The key is consistency of treatment.

Mutual general insurers currently in a profitable part of the ‘insurance cycle’ (GIM1240) will pay less tax than other general insurers as their underwriting profits are not taxable. However, in periods of underwriting loss, a mutual general insurer will pay more tax than a non-mutual as there is no facility to set off the underwriting loss against investment income and gains. An insurer that has an established mutual business would require strong evidence to support a change of character. See GIM9160 for the tax issues when a company changes from mutual to non-mutual basis.