Mutual insurance: distributions by mutual insurers
It is fairly rare for a mutual general insurer to make distributions out of its profits otherwise than on a winding-up. Normally the benefit of any surplus is passed back to members by way of a reduction in the premiums charged on new business. Where distributions are made, however, ICTA88/S490 (1) and ICTA88/S490 (3) provide that the provisions of the Taxes Acts will apply in the usual way to the extent that the distribution is made out of taxable profits. For this purpose taxable profits comprise
- profits within the charge to corporation tax
- franked investment income
- group income, and
- foreign income dividends.
Most of these concepts ceased to have relevance for distributions made after 6 April 1999 with the fundamental modifications of the imputation system. The shadow ACT regime may be relevant (CTM1800+).
There was no liability to account for ACT on a distribution that was derived from a surplus on mutual trading. The legislation gives no guidance as to how a distribution is to be matched with the two categories of profit, but must be consistent with the facts. So if a distribution is expressed to be made out of the profits of a particular period the company cannot say that it derives from a non-taxable surplus if there is no such surplus in that period. Otherwise a company may choose the origin of its profits, taxable or non taxable.
The tax treatment of the recipients of distributions by mutual concerns is considered in detail in BIM24550 onwards. In general such distributions as do not fall to be treated as dividend income will rank as trading receipts to the extent that the recipient obtained a deduction for the corresponding premiums. Where they are made during the lifetime of the mutual insurer this will follow from trading income principles; and where they are made in or in anticipation of a winding-up the provision is ICTA88/S491, which reverses the effect of the decision in Brogan v. Stafford Coal & Iron Co. Ltd 41TC305.