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HMRC internal manual

Lloyd's Manual

HM Revenue & Customs
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Corporate members: stop-loss contracts

‘Stop-loss insurance’ is defined by FA94/S230 as any insurance taken out by a member against underwriting losses, except ‘quota share contracts’ defined at FA94/S225. Confusingly, because of the particular nature of that definition, ‘stop-loss’ as defined may include quota share contracts as normally understood. A ‘quota share contract’ as defined is explained in more detail at LLM4160, and is one used by members to exit the market. ‘Stop-loss’ (proportional quota share) insurance may be taken out by a syndicate managing agent as part of its normal reinsurance programme, and similar reinsurance might also be taken out by a corporate member, in which case it will be allowed on the authority of FA94/S225(1)(a). Contracts may cover all business, or losses from particular syndicates or on particular classes of business.

Section 225 FA 1994

FA94/S225 (1) provides for the deductibility of premiums paid to obtain stop-loss insurance and the deductibility of any repayment of stop-loss receipts by the member.

FA94/S225 (2) deals with the assessment and timing of recoveries under stop-loss policies. Amounts payable to a corporate member under such policies are assigned to accounting periods by reference to the underwriting year (the calendar year) in which the relevant loss is declared.

Stop-loss premiums

A stop-loss premium is deductible as an expense but, prior to FA 2012, the legislation is silent on timing. There was, therefore, a difference in treatment of such a premium, depending on whether it was paid at syndicate-level or at the level of the corporate member. The declaration basis continues to apply where the premiums are payable under a stop-loss entered into at syndicate level (FA94/S220). However the treatment of a premium payable at the level of the corporate member will depend on when the stop-loss insurance was taken out. If it was taken out before 6 December 2011, the premium is allowable when deducted in the accounts under normal accountancy principles and will not be subject to deferral on the declarations basis. FA94/S225 (3D) provides that any premium under a stop-loss insurance taken out on or after 6 December 2011 is to be treated as arising to the member directly from its membership of the syndicate or syndicates in relation to the activities of which the insurance was taken out. It therefore provides that declaration basis applies to such a premium (see LLM4155).

Stop-loss recoveries: calendar year accounts

The recovery will be assessed for the same year as that for which the related inception year (Lloyd’s YOA) is assessed under the declaration basis. For example, stop-loss insurance is taken out on business underwritten in the YOA2005. The 2005 syndicates close at 31 December 2007 and results are declared in April 2008. Where a corporate member makes up its accounts to 31 December, the profits of the 2005 syndicates will be assessed in the accounting period ended 31 December 2008 and stop-loss recoveries paid in respect of a loss in the 2005 YOA will be treated as a trading receipt in computing the profits of the accounting period ended 31 December 2008.

Stop-loss recoveries: other accounting periods

If the year in which the loss is declared falls into two accounting periods (see LLM4070), the insurance money is apportioned on a time basis to the two periods and the apportioned part is treated as a trading receipt in the accounting period to which it is allocated. For example, where a corporate member makes up its accounts to 31 March 2008, 3/12 of the insurance money paid in respect of the year 2005 loss would be treated as a trading receipt in computing profits for the AP ended 31 March 2008, and 9/12 as a trading receipt in computing the profits for the AP ended 31 March 2009.

Late notification of recoveries

FA94/S225 (3) ensures that assessments or further assessments can be made where there is notification of a recovery under a stop loss policy after the normal time limits for assessment have expired. Where HMRC has not been notified of the payment of insurance money at least thirty days before the last date on which a normal time limit assessment can be made, the recovery is treated as a trading receipt of the accounting period in which it is payable.

Late assessments under TMA70/S36 (fraudulent or negligent conduct) can still be made if necessary, by virtue of FA94/S225 (3) (b).

Stop loss recovery extinguishes loss

SI1995/351 regulation 6 applies where the inclusion of a stop loss recovery (or an apportioned part of it) as a trading receipt in an accounting period has the effect of reducing or extinguishing a loss in that accounting period. Where normal time limits would preclude an assessment to make good any excess relief given for the loss, regulation 6 extends the time limit. Such an assessment is permitted if made before the end of the underwriting year following the underwriting year in which the insurance money is received.