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HMRC internal manual

Lloyd's Manual

Names: other Lloyd’s-related expenditure: items allowable when paid: bank guarantees, interest, legal expenses

LLM5150 and LLM5170 give examples of the most common type of expenses that are allowable as trading deductions for the tax year corresponding to the calendar year in which they are paid, regardless of the underwriting account to which the expense relates.

Bank guarantees and letters of credit

Lloyd’s rules permit underwriters to provide a bank guarantee or a letter of credit in favour of Lloyd’s instead of cash or securities for their Lloyd’s Deposit.

Setting up charges and yearly fees are often based upon a percentage of the amount guaranteed. The cost of renewing or keeping in force an existing bank guarantee is allowable. For example, a Name pays £250 in August 2003 to renew a bank guarantee relating to underwriting for the 2004 account. This is allowed as a trading deduction in 2003-04.

The initial costs of setting up a bank guarantee are capital expenses, incurred in order to put the underwriter into a position to be able to trade, not expenses incurred in the course of trading), and are not allowable.

Where the sum guaranteed under an existing arrangement is increased, the cost of arranging the increase in the guarantee facility is an ‘enduring benefit’, which extends the underwriter’s trade. The cost of its acquisition is a capital expense and is not allowable.

Bank guarantee fees during the period of interavailability (LLM6020) should be apportioned between the separate businesses carried on by the Name and by the corporate member.

Assets supporting the arrangement are not regarded as underwriting business assets for either income tax or capital gains tax purposes. Accordingly the income and gains arising on these assets are not part of the Lloyd’s trading profits. This is particularly relevant where the chargeable event gain regime can apply to life policies (see LLM5080).

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Interest on loans to fund underwriting

Where Names have taken out loans to fund various aspects of their underwriting activities, in general the amount paid will be an allowable deduction for the tax year corresponding to the calendar year in which the interest is paid. As with all trading deductions, the payment of interest must be incurred wholly and exclusively for the purposes of the trade of underwriting as a member of Lloyd’s (ICTA88/S74 (1)(a) and ITTOIA05/S34). This means that, when first taken out, the loan must be for trading purposes. Loans used to fund losses and cash calls, Lloyd’s Deposits and reserves, payment of stop loss premiums and other non-syndicate expenses will satisfy this test.

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Interest on unfunded losses

When a syndicate makes a loss for an account, the syndicate managing agent calls on the syndicate members to pay cash to fund the loss. To the extent the Name does not meet the cash call, the Name has an unfunded loss. Interest on unfunded losses (described on R&R Finality Statements as ‘Interest and other charges’) is recharged to Names by syndicate managing agents and is allowed as a deduction from syndicate results, so it should not be allowed separately as a non-syndicate expense.

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Litigation costs

Where Names enter into legal action in connection with or arising from membership of Lloyd’s, litigation expenses are allowable as trading deductions. Any refunds of litigation expenses, for example as the result of successful legal action, are taxable trading receipts of the tax year corresponding to the calendar year of receipt.

Where managing agents enter into legal action in connection with a claim on a policy, the expenses are reflected in the syndicate accounts and are not allowed as a deduction for the Name.