GIM4190 - Taxation of general insurance: commencement and cessation

Commencement

An insurance company will generally start trading some time after it receives its FSA permission. If it has been formed to trade with the public it will start to trade on the date on which it first holds itself out to potential customers as being “open for business”. But if it has been formed for a specific purpose, such as to reinsure, or accept a transfer of, an existing block of business, the date of commencement may coincide with the date on which the company first concludes a contract of insurance, or has the business transferred to it.

Cessation

At one time the Revenue took the view that the trade of an insurer ceased when the company stopped accepting new business, and that what it did after that date amounted to no more than the settlement of the contingent liabilities which it had undertaken during its trading life. This view is incorrect. The trade of an insurance company involves both the effecting and carrying out of contracts of insurance. The negotiation and settlement of claims is an integral part of the trade of insurance. Case law supports this view. See for example Stewart v Oriental Fire and Marine Insurance Company Ltd. (Lloyd’s Law Reports [1984] vol.2 p.109) or Scher v. Policyholders Protection Board ([1993] All ER 407).

Cessation of trade does not necessarily occur, therefore, when a company ceases to accept new business. A company may be treated as continuing to trade for so long as it maintains its business structure, continues to manage its portfolio of investments and negotiates and settles claims in the ordinary way. An insurer may apply to the FSA for a variation of its permission to carry on insurance business to remove the activity of effecting contracts of insurance from its permission, thus restricting its activities to carrying out insurance contracts to enable it to run off its remaining liabilities. This may be clear evidence of an intention to cease trading at some future time, but should not, of itself, be regarded as constituting a cessation. On the other hand the cancellation of an insurer’s permission will amount to a cessation. The FSA will not, however, cancel an insurer’s permission until all its insurance liabilities have been discharged. See SUP 6 in the Supervision Sourcebook in the FSA Handbook.

Reinsurance of the tail of the business will not, in itself, affect the status of the insurer since there is no privity of contract between the reinsurer and the original insured persons, and the insurer remains liable in full under the terms of the contracts entered into. However, the arrangement of such reinsurance - especially within a group - may coincide with, or be a preliminary to, the dismantling of the company’s business structure and the disposal of its investments and may thus signal a true cessation.

The activities of a branch of an overseas insurer may be replaced by similar activities undertaken by a UK resident subsidiary but the branch may continue to run off existing business. In such circumstances, branch losses will normally continue to be available to the branch and cannot be transferred to the subsidiary under the provisions of ICTA88/S343 (see GIM4220).