A Press Release issued on 30 April 1996 announced a change in
practice on the tax treatment of premiums paid and benefits
received under locum and fixed practice expenses insurance
policies. It also gave taxpayers the option to make error or
mistake claims if they paid premiums on such policies before the
change.
The Press Release said:
“Tax treatment of premiums and benefits under locum
and fixed practice expenses insurance policies
The Inland Revenue have today announced revised arrangements
covering the way in which premiums paid for insurance policies to
cover the cost of engaging a locum tenens, and benefits paid out
under such policies, will be treated for tax purposes in the
future.
This change of practice has been the subject of detailed
consultation with the main parties likely to be affected, and the
particulars set out below reflect their views.
Details
1) Some professional people who practise alone or in
partnership, in particular medical professionals, take out
insurance policies to indemnify themselves against the cost of
engaging a locum tenens, or against other practice expenses, in the
event of the policyholder's illness or other incapacity. In the
past the Inland Revenue's view has been that premiums and benefits
under these policies should be excluded from the calculation of
taxable professional profits in the same way as other permanent
health insurance premiums and benefits are excluded.
Change of view
2) The Inland Revenue have now received legal advice that
this view is incorrect. Premiums on policies of indemnification of
this nature are deductible in computing profits under Case II of
Schedule D. Equally, benefits payable under the policies should be
regarded as Case II receipts on the basis that they diminish the
allowable expenses of the profession.
3) This treatment of both the premiums and the benefits holds
good whether a person is obliged to insure (because of partnership
obligations or National Health Service regulations) or does so as a
matter of commercial prudence.
4) Where, however, the particular policy also includes
insurance against other, non-business, risks such as the cost of
medical treatment for accident or sickness of the insured, the
premiums will be incurred partly for a personal purpose. Only the
proportion of the premium relating to practice expenses cover,
calculated on a reasonable and consistent basis, will then be
deductible.
How the change of view will be put into effect
5) In calculating profits for periods of account that begin
on or after 1 October 1996, the premiums on locum/fixed practice
expenses policies will be deductible and the benefits treated as
taxable business receipts.
6) Where the profits for a period of account beginning before
1 October 1996 have not been agreed with the Inspector and
assessments have not otherwise become final, premiums should be
deducted and benefits treated as taxable business receipts.
Alternatively, where premiums and benefits have been excluded from
the computation of taxable profits for earlier settled periods this
practice may be continued for unsettled periods of account
beginning before 1 October 1996 subject to paragraph 7 below.
7) Where figures for periods of account beginning before 1
October 1996 have become final and premiums and benefits have been
excluded from the computation of taxable profits for those periods,
claims to repayment under the error or mistake provision (Section
33 Taxes Management Act 1970) may be made subject to the general
rules for error or mistake relief, in particular the six year time
limit. Under such a claim tax relief may be obtained for previously
unallowed premiums but the total unallowed relief will be reduced
by any untaxed benefits relating to the earliest period of account
to which claims relate and all subsequent settled periods.
8) If an error or mistake claim is made premiums must also
then be deducted and benefits treated as taxable business receipts
for the unsettled periods mentioned in paragraph 6 above.
Notes for editors
Tax assessments currently become final 30 days after being
raised unless the taxpayer makes an appeal, or when the appeal is
determined. There is, however, provision in Section 33 of the Taxes
Management Act 1970 for a taxpayer to seek to re-open a final
assessment for a year of assessment if there has been any error or
mistake in a return. Such claims have to be made within six years
of the end of the year of assessment in which the assessment for
the year in question is raised. Claims for 1990-91 and subsequent
years of assessment would always be within this time limit so long
as they are made by 5 April 1997.
This change of view would provide an opportunity for any
taxpayer who so wished to invoke that facility and have his or her
liability revised in the light of the new view of the
law.'”
An article in TB24 issued in August 1996 emphasised that error
or mistake relief claims under the Press Release of 30 April 1996
are valid only for locum and fixed costs policies. The error or
mistake claims are not competent for permanent health insurance
policies, see
BIM45560.
The Tax Bulletin article also provided guidance on error or
mistake relief claims by persons who carry on business in
partnership as follows:
’Relief for the premiums paid on locum and fixed costs
policies are a deduction in computing the taxable profit of the
single trade or profession the partnership carries on, even if they
have been paid personally by one partner (paragraph 5.17 SAT 1
(1995)). The claim must therefore take into account both the
premiums paid and the benefits received on locum and fixed costs
policies for all the members of the partnership for the period of
the claim and subsequent periods, as explained in the Press
Release. It is not possible to determine whether the profits of the
partnership already taxed (and hence the share of any individual
partner) have been excessive unless the premiums and benefits on
all such policies held by the partners are given the same
treatment.
Some partnerships may include partners who hold locum and
fixed costs policies and other partners whose sickness insurance
cover is under other permanent health insurance arrangements. The
two types of policy must be distinguished in making error or
mistake claims. There is no relief for premiums on policies that
provide ordinary life, accident or sickness cover. For tax the
premiums are a private expense of the individual and the benefits
received under the policies are not business receipts.'
