GIM4040 - Taxation of general insurance: UK GAAP

Like all traders, general insurers are subject to FA98/S42, which introduced a requirement for Case I profits to be computed “on an accounting basis which gives a true and fair view”. FA02/S103 introduced a standard definition for references to accounting practice by amending the wording in section 42 to “in accordance with generally accepted accounting practice” (GAAP). In particular it introduced a new section 836A into ICTA which provides a definition of “generally accepted accounting practice”. The meaning of section 42 did not change: the requirement that computations of Case I profits must be in accordance with a true and fair view was maintained because the definition of GAAP so requires.

UK GAAP applies to the computations submitted by branches of overseas insurers. The Revenue’s view is that this requirement has always been the case. Even before the change “true and fair view” was by reference to the UK Companies Act, which meant in accordance with UK GAAP. The new section did not change anything in existing law; it just made the existing requirement explicit. (The topic of non-resident general insurers is covered in GIM10000+).

Broadly, therefore, Case I principles apply to general insurance as they do to other trades, but they may need to be adapted to the particular circumstances of insurance. The notable exception to the Case I treatment is the surplus arising from mutual insurance activities which is not a taxable profit. Mutual general insurers are assessed on investment income and chargeable gains, but there is no set off of any underwriting losses or of the general expenses of running the business. (The topic of Mutual Insurance is covered more fully at GIM9000+.)