GIM9150 - Mutual insurance: distributions by mutual insurers

It is relatively rare for a mutual general insurer to make distributions out of its profits otherwise than on a winding-up. Normally the benefit of any surplus is passed back to members by way of a reduction in the premiums charged on new business. Where distributions are made, however, ICTA88/S490 (1) and ICTA88/S490 (3) make it clear that the provisions of the Tax Acts will apply to them in the usual way to the extent that the distribution is made out of taxable profits. For example, ACT must be accounted for where the distribution is made before 6 April 1999. For this purpose taxable profits comprise:

• profits within the charge to Corporation Tax;
• franked investment income;
• group income; and
• foreign income dividends.

There was no liability to account for ACT on a distribution that was derived from a surplus on mutual trading. The legislation gives no guidance as to how a distribution is to be matched with the two categories of profit, but any matching must, of course, be consistent with the factual situation. If, for example, a distribution is expressed to be made out of the profits of a particular period the company cannot say that it derives from a non-taxable surplus if there is no such surplus in that period. Subject to this need to have regard to any relevant facts, a company may choose to say that its distribution is made out of non-taxable, or taxable, profits, to whatever extent that it wishes.

The tax treatment of the recipients of distributions by mutual concerns is considered in detail in BIM24550 onwards. In general such distributions that do not fall within Schedule F will rank as trading receipts to the extent that the recipient obtained a deduction for the corresponding premiums. Where they are made during the lifetime of the mutual insurer this will follow from general Case I principles; and where they are made in or in anticipation of a winding-up it is provided for by ICTA88/S491, which reverses the effect of the decision in Brogan v. Stafford Coal & Iron Co. Ltd (41TC305).