GIM4080 - Taxation of general insurance: annual accounting: acquisition costs and administrative expenses

Acquisition costs are defined in note 6 to the Profit and Loss Account Format as “the costs arising from the conclusion of insurance contracts. They…cover both direct costs, such as acquisition commissions or the costs of drawing up the insurance document or including the insurance contract in the portfolio, and indirect costs such as advertising costs or the administrative expenses connected with the processing of proposals or the issuing of policies.” Schedule 9A distinguishes acquisition costs from administrative expenses, which include the costs of premium collection, portfolio administration, handling bonuses and rebates, and inward and outward reinsurance. In particular, administrative expenses include staff costs and depreciation not otherwise shown under acquisition costs, claims incurred or investment charges.

The main area of concern in relation to such amounts will be to ensure that acquisition costs are correctly deferred in parallel with the deferral of premiums. Paragraph 12 of Schedule 9A Companies Act 1985 contains a statutory requirement to defer “the costs of acquiring insurance policies which are incurred during a financial year but which relate to a subsequent financial year”. For general insurance, note 17 to the balance sheet format requires that the amount of any deferred acquisition costs shall be deferred on a basis that is compatible with that used for unearned premiums. The deferral of acquisition costs for tax purposes should follow from the accounting treatment. Paragraphs 132 and 133 of the ABI SORP of December 2005 provide further details on this. The amount deferred should be commensurate with the unearned premium provision, and allocated against classes of business. Advertising costs should not be deferred unless they relate directly to the acquisition of new business. Inspectors should seek advice from a Revenue Accountant if they have any doubts about whether acquisition costs have been correctly deferred. The balance of deferred acquisition expenses is treated as a money debt, exchange gains and losses on which fall within the loan relationships legislation (section FA96/S100 (10)(b)).

Note that claims handling expenses are considered in relation to reserves at GIM6130.