As with most things in life, there will be some disappointed policy owners, and on the other hand, there will be many policyholders who now have clarity and will be receiving a settlement from their insurers. With that said, what are the tax implications of an insurance payout for business interruption?
To answer the question, I thought my best bet was to go straight to the horse's mouth, so to speak, the HMRC. Just like Alice, I tumbled into that rabbit hole of test cases and BIM (Business Income Manual) reference numbers. One would divulge "Eat me." and I could feel my understanding of the subject growing, then I'd turn to another which said "Drink me." and my knowledge was shrinking again, before long I was thinking, "Off with my head."
I can sit at a computer and read code and have a full understanding of what's going on. However, when it comes to Government accounting, and legal speak my eyes glaze over, my mind shuts off, and I'm done, (pretty much in the same way as when my wife is nagging me about that thing I agreed to do ten years ago, but never got around to finishing). So I thought it best to go and see what accountants were saying.
Albert Einstein once said, "If you can't explain it simply, you don't understand it well enough." HMRC, Accountants and Solicitors, please take note. But I did not let this dissuade me in my quest to find a simple answer, so I kept digging and reading until at long last there it was in black and white, The tax payable will depend on whether the insurance payout is classed as revenue or capital.
Well, that was simple enough or was it? I thought we'd best take a look at the business interruption policy and what it covers and see which bits tax may be payable on to get an even better understanding.
Insurers, let's stick them in with the accountants as being some of the hardest people to understand. They often talk a foreign language, or so it seems to me, luckily I have a secret weapon in the fact I work with brokers. Now from a layman's perspective, I thought that having business interruption would cover everything a business might lose if essentially the company couldn't trade as normal. Of course, I was wrong.
There are two parts insured working expenses and uninsured working expenses, and depending on who you are and the cover you chose will depend on what is covered and what isn't. According to Aviva, there's a whole list of pitfalls when it comes to uninsured working expenses that business owners choose not to insure. Such as bad debts owed to them, business rates, rent, subcontracting, purchases, utilities, transport, carriage and freight, packing and packing materials, wages and salaries.
That's quite a list and in my humble opinion makes the issue even more confusing. So, I thought the best bet is to go back to that old acronym K.I.S.S. (Keep It Simple Stupid). So without getting into tax mumbo jumbo or legal-speak, let's tackle this. Every month or whatever time frame you use, you calculate your turnover, and out of that you take your operating costs and anything that is left is the profit on which you pay tax. Now, should you receive an insurance payout that effectively becomes part of your turnover and the tax payable is no different from any other period.
In short, you only pay tax on your insurance payout if it is or forms part of your taxable income.