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HMRC internal manual

Lloyd's Manual

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HM Revenue & Customs
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Corporate members: quota share contracts

A ‘quota share contract’, in the context of the specific Lloyd’s tax legislation, is one which transfers the liability for claims covered from the syndicate member to the reinsurer offering the quota share contract. It also transfers to the reinsurer the associated rights of the syndicate member, including the right to receive distributions of syndicate profit. Depending on the precise wording of the contract, it may be more akin to a transfer of business than true insurance, but the legislation ensures that payments by the member are nevertheless deductible as an expense.

Confusingly, the term ‘quota share’ is more often used in the insurance industry to refer to proportional treaty cover, which in the tax legislation falls within ‘stop-loss’ (a description the industry usually applies to non-proportional cover). In any correspondence concerning a quota share premium or contract, it is important to find out exactly what the contract does cover.

Lloyd’s regards an approved quota share contract as effectively ending the member’s liability for the claims covered by the contract. If a member takes out a quota share contract covering the whole of its Lloyd’s participation, Lloyd’s is prepared to regard the member’s participation at Lloyd’s as terminated and will release the member’s deposit.

Amounts paid under ‘quota share contracts’ are only deductible if the contract is made in accordance with the rules and practice of Lloyd’s, and if the contract provides for another person to take over any rights and liabilities of the corporate member under any of the syndicates of which it is a member (FA94/S255 (4)).

FA02/SCH32 contains rules on the taxation of ‘quota share contracts’ which apply for contracts entered into after 16 April 2002 (see LLM5210). These rules are applicable to both individual and corporate members, but in practice will mainly affect individuals.

Quota share premiums

Premiums payable for quota share reinsurance are deductible ‘irrespective of the purpose for which the contract was entered into’, under FA94/S225 (1)(b). This wording is to cover the uncertainty referred to above, and the possibility that these premiums might be regarded as being made to allow a company to cease trading as a Lloyd’s underwriter, and so disallowable under the principles established in CIR v Anglo Brewing Co Ltd (12TC803) - BIM38310 (see LLM10000).

FA94/S225 (1)(b) does not, however, widen the actual purpose of a quota share contract, it merely makes the premiums deductible irrespective of purpose. A payment under a quota share contract, which, for instance, forms part of a series of arrangements for the reconstruction of an underwriting business, is not necessarily deductible.

Receipts under quota share contracts

Payments may be received by a corporate member under quota share contracts as well as made, but only if the quota share contract is used to reinsure part of the member’s business. Payments received are not dealt with specifically under FA94/S225 and their chargeability and the timing of their assessment should be decided under normal rules.

If the quota share contract is used to leave the Lloyd’s market entirely then sums after the operative date will generally be received and retained by the reinsurer.