Annex 1: Minor changes in the law made by the Act: Change 28: Sums recovered under insurance policies, etc: section 106
This change gives statutory effect to the accountancy treatment for crediting a sum recovered under an insurance policy.
Section 74(1) of ICTA lists various items in respect of which no deduction is allowed in computing a trader’s profits including:
“(l)any sum recoverable under an insurance or contract of indemnity”
A sum recovered under an insurance policy or contract of indemnity is a receipt and not therefore an item in respect of which a trader would expect to make a deduction in calculating his or her profits.
The courts have interpreted section 74(1)(l) of ICTA and the enactments from which it is derived as prohibiting the deduction of a loss or expense incurred by the trader to the extent that the loss or expense is recovered under an insurance policy or contract of indemnity (even where that recovery is on capital account). See, for example, Lawrence LJ’s description of the meaning of the equivalent provision in the Income Tax Act 1918(19) on page 381 of Green v J Gliksten and Sons Ltd (1929), 14 TC 364 HL:
“in arriving at the balance of profits or gains there has to be no deduction in respect of a loss which is covered by insurance to the extent by which that loss is so recovered.”
Section 106 achieves the same effect as section 74(1)(l) of ICTA by bringing a capital amount recovered into account as a trade receipt rather than by prohibiting a deduction in respect of the loss or expense in respect of which it is recovered. This makes the proposition easier to understand without changing the law.
Section 74(1)(l) of ICTA requires a deduction in respect of a loss or expense to be reduced by the amount of any insurance recovery. But where the loss and the recovery fall in different periods the accountancy treatment is to deduct the loss or expense in the year in which it is incurred and to credit the recovery in the accounting period in which it arises.
In practice, the Inland Revenue allows traders to follow the accounting treatment in crediting the recovery. This informal concession is set out in paragraphs 40130 and 40755 of the Inland Revenue Business Income Manual. Section 106 gives the concession statutory effect.
This change will not alter the amount charged to tax. The most it will do is affect the timing of that tax liability. In a small minority of cases this could mean a different rate of tax being applied, according to individual circumstances. Any overall tax effect is likely to be negligible.