BIM40685 - Receipts: insurance commission: acceptable accountancy treatment for computing profits

The general rule is that incomings which arise in the course of a trade should be recognised for Case I purposes at the time they are recognised in the trader's own accounts, so long as the accounts are drawn up in accordance with generally accepted accounting practice, see BIM40070. Commission arising to an intermediary, such as an agent or broker, for putting business the way of an insurer (or supplier of some other service) follows this rule. This includes situations where an insurance agent receives commission from an insurance company ‘up-front', that is at the time a life assurance policy or a customer, on what is known as `indemnity terms’, enters into pension contract.

The starting point in computing taxable trading profits is the profit shown in accounts drawn up in accordance with current generally accepted accounting practice. These profits are subject to adjustment for tax purposes either in accordance with specific provisions (such as the ’wholly and exclusively' test - see BIM42100 onwards) or in accordance with principles developed by the courts in order to ascertain the `full amount of the profits' as required, for income tax by ITTOIA/S7 and for corporation tax by CTA2009/S8(3).

UK GAAP, and in particular UITF40 Revenue recognition and service contracts, confirms that in situations where the right to consideration does not arise until the occurrence of a critical event, then revenue should not be recognised until that event occurs. Where a seller does not control the occurrence of the critical event then revenue should not be recognised until that event occurs.

Where an intermediary is not entitled to keep their commission until confirmed by some future event and that future event is outside the control of the intermediary, for example the customer pays an annual premium, then the intermediary should not recognise his commission until confirmed by the event, for example the customer pays the premium.

The position in respect of accounts prepared under IAS is currently under review and advice should be taken from your local accountant as to the latest position.