Tax on insurance payout

groundy

I have a client who received £90,000 last year from an indemity insurance settlement. The insurance payout was agreed as the cost to replace equipment damaged in a flood.

However, my client was able to repair most of the machinery for very little cost and therefore I showed the balance of the insurance settlement as sundry receipts and paid corporation tax on the gain.

My client has contacted me today stating that the insurance company have informed him that as it was an indemnity settlement and that no tax should be payable.

My thought has always been that any insurance payout to cover replacement assets is taxable, on the basis that had new equipment been purchased then tax relief would have been available.

I would appreciate any comments from anyone that has experienced this before.

JodieR

I think that the rule of thumb is that if the insurance premiums were allowable in the accounts then any payout from that policy would be taxable (and if you couldn't claim the premiums then there's no tax to pay on any payouts). But I'm not 100% sure about it.

Monsoon

Not sure if this helps?

http://www.hmrc.gov.uk/manuals/bimmanual/BIM40755.htm

Might be worth digging around in the manuals.