A Supreme Court ruling means that many traders who lost income because of coronavirus will receive a payout on their business interruption insurance policies. How and when should this be reported for tax purposes?
Court ruling. On 18 January 2021 the Supreme Court ruled that insurance companies must pay out on business interruption insurance policies which included clauses for loss of income resulting from notifiable diseases (coronavirus) and enforced closure of business premises. This raises questions about the tax treatment of the payouts and how they interact with government support grants.
Taxable or not? We’ve seen reports suggesting that only if a business received tax relief for the policy premiums would it be taxed on any payouts. Whilst this is true for some types of insurance, it’s not the case for business interruption insurance where the payout is for loss of profits or turnover. The money received should be treated for income and corporation tax purposes in the same way as trading income.
Tax timing. Insurance proceeds are taxable income for the accounts in which they are recorded. In turn, this depends on whether accounts are prepared using generally accepted accounting principles. If so, the insurance proceeds should be included in the accounting period for which the profit/turnover was lost. However, if a payout wasn’t “virtually certain” it ought to be reported in the accounts covering the date when it became so. As the right to coronavirus-related payouts was contested by insurance companies it’s reasonable, in most cases, to include them in your accounts which cover the date of the Supreme Court ruling. Check this with your accountant.
Government grants. Most insurers gave an undertaking in September 2020 that they would not deduct government coronavirus support grants from business interruption payouts. Further, payouts don’t count as income for the purpose of working out entitlement to government grants.