GIM9040 - Mutual insurance: mutual insurance as a trade: severability of mutual and non mutual business
A company may carry on some activities which clearly fall within
the description of mutual business, and some which do not. Where
the mutual activity falls short of trading then that activity can
clearly be severed from a non-mutual trading activity for tax
purposes (see Carlisle & Silloth Golf Club v Smith (6TC48)).
Similarly there would be no difficulty in separating out the two
activities should a case arise in which they constituted separate
trades.
Difficulties arise however where the activities carried on by
the mutual body constitute a single trade, as will almost be
inevitably be the case with a mutual insurer. One possibility is
that the mutual insurer does not wish (or is not authorised) to
write a particular line of business itself, but is willing to put
members who require cover in touch with another insurer, from which
it receives commission. This is akin to a trading activity, but
clearly there is no mutuality. Rather than argue that the
non-mutual activity infects the whole of the trade, it may be
accepted that the commission is a receipt of an income nature that
is separate from the mutual trade and assessable under Case VI of
Schedule D, subject to a deduction for any expenses specifically
referable to its receipt. A similar approach may be taken to the
receipt of commission from the underwriting of new issues of
shares.
The most difficult situation likely to be met in practice is
one in which the trade has the characteristics of mutual trading,
but where there are some policyholders who are excluded from any
entitlement to participate in surplus. If these are “junior
members” of the type described in
GIM9020 their existence can be ignored.
And where the non-mutual underwriting activity is very small in
scale as compared with the mutual activity it may be ignored on de
minimis grounds. It will not usually be appropriate to take a de
minimis approach to a regular activity that is different in
character from the main body of the trade, such as the writing of
non-mutual reinsurance business by a company whose core business is
mutual direct insurance.
Where the non-mutual underwriting activity cannot be regarded
as de minimis, it will be necessary to decide whether the partial
breakdown of the identity between the contributors and
participators infects the entire business with non-mutuality, or
whether it can, for tax purposes, be divided into a mutual and a
non-mutual part. There is no decided case that is directly in point
here, although the outcome in the Municipal Mutual case (16TC430)
was that the company’s fire insurance business was treated as
mutual whilst its employers’ liability business was held to
be non-mutual. It will, of course, be a question of fact in each
case as to whether or not the necessary division can be made
between the mutual and non-mutual elements.
Normally, the question as to whether an insurance company is
trading on a mutual basis will be decided when it starts to trade,
and where it has been accepted that a company’s business is
mutual, Inspectors need not re-test the issue unless
- there is a change in the company’s constitution, or the way in which it does business, which calls its mutual status into question;
- the company is being used for tax avoidance (see GIM9140);
- it becomes evident that the wrong criteria were used when the original decision was made; or
- the company itself claims that it is no longer operating on a mutual basis.
See GIM9120 in relation to “mutual” health insurers
