BIM40235 - Receipts: unclaimed balances: receipts that become taxable by operation of law: example

An insurance broker acts for clients on a commission basis. The broker pays client premiums over to various insurers, less the broker’s own commission. In some cases the insurance company, although underwriting the risk, does not ask for payment of the premium. After 6 years the broker takes unclaimed balances to their profit and loss account. The broker seeks to deduct the sums in their tax computation.

The broker is the insured’s agent. In this role the broker procures insurance from an insurer on behalf of their client. This is a common law relationship governed by the law of agency. The rights and obligations as between the agent and the principal are contractual. Any action based on a breach of these contractual obligations (including a breach of the duty to account to the principal), is governed by Section 5 of the Limitation Act. That section provides a 6-year time limit.

When the premium becomes due to the insurer the broker will be in breach of contract if they do not pass it on. This is a ‘cause of action’ under Section 5 of the Limitation Act and after 6 years, following Jays, any unclaimed balances become trade receipts of the broker, and so taxable at that time.

Health warning

This page is part of the section of the Business Income Manual on unclaimed balances. You should read the whole section to understand this topic: see the contents page at BIM40200.