GIM11060 - Captive insurers: taxation issues: possible approaches

There are a number of possible approaches to the taxation of captive insurers.

Residence

Few captives are UK resident (see ITH1705). Those that are may still merit enquiry. The reason for establishing a UK resident captive may, for example, be to take advantage of an allegedly mutual status (see GIM9140), or to charge its affiliates inflated premiums, and set up correspondingly inflated claims provisions.

It is also possible that a non-UK captive may be brought onshore. It may be incorporated in another jurisdiction but become resident in the UK by virtue of central management and control being exercised in the UK. This may be to avoid another EU country’s equivalent to the UK’s CFC legislation ( GIM11070). Advice on “central management and control” should always be sought from Revenue Policy International.

Trading in the UK

The extent of the work done by a captive insurer in the UK may support a challenge that it is trading in the UK via a branch or agency. ITH 1710 describes cases in which it has been held that companies were trading illegally in the UK in “effecting” of contracts of insurance, or by virtue of the organisation of their business.

Deduction of premiums

Wherever the captive is resident, contributions to the assets of captive insurance companies in the form of premiums will normally qualify for tax relief in the same way as any other payments for insurance. Provided the policy issued by the captive covers genuine risks for arm’s length premiums, and that the captive has sufficient resources to meet potential claims, it is doubtful that a successful challenge could be made to the deductibility of the premiums solely on account of the relationship between the parties.

Occasionally it may be possible to challenge the deductibility of premiums on the grounds that the payment is not truly made for the purposes of the insured’s trade (under ICTA88/S74 (1)(a)), where for example:

• negligible risks are insured against; or
• policies are taken out which the captive has no hope of honouring should the insured contingency actually arise; or
• premiums exceed the market rate; or
• insured losses may not be claimed.

Transfer pricing

Alternative arguments may also be possible under the transfer pricing rules in ICTA88/SCH28AA. See INTM430000.

Capital

In the early stages of the captive’s career when resources are limited and there is a need to build up reserves speedily, it is also open to the Revenue to argue that the premiums are capital payments with a view to bringing into existence an asset of enduring benefit to business, namely a reserve fund to provide against future contingencies.