Business interruption insurance – Are pay-outs taxable?

Business interruption insurance provides cover for losses as a result of events that close or severely disrupt the business. Policies may cover a loss of profits that arise as a result of the ‘interruption’. They may also meet fixed costs that the business has to continue to meet despite being closed.
Many businesses who had been forced to close as a result of the Covid-19 pandemic and associated lockdown measures and who attempted to make a claim on policies that they believed provided cover for the associated loss of profits found that their insurers did not agree. The sticking point was the wording of the policy where this excluded diseases unless specifically named.
To provide clarification for policyholder and insurers, the Financial Conduct Authority (FCA) took a test case. The high court found mostly in favour of the policyholders. On appeal, the Supreme Court ruling in January furthered strengthened the policyholders’ position. As a result of the Supreme Court ruling, around 370,000 small businesses may receive a pay-out.
Tax implications
HMRC’s general stance is that if the premium was tax deductible, any insurance receipts are taxable. Businesses would have been able to deduct the cost of business interruption insurance premiums as long as the cost was incurred wholly and exclusively for the purposes of the business.
Where a policy pays out an amount to cover the loss of profits during the period when the business was shut, the receipt is treated as trading income. Payments to cover costs are also taxable if a deduction is allowable for the cost.
Where accounts are prepared on the cash basis, the insurance receipt is taken into account in the accounting period in which it is received.
However, if the accounts are prepared on the accruals basis (as would be the case for a company), the receipt should be matched to the period to which it relates, for example, the accounting period in which the lockdown giving rise to claim fell. However, where there was doubt as to whether a payment would be made, as was often the case in relation to Covid-19 claims, the critical time would be the time when it became clear that a payment would be made. This may be the period in which the date of the Supreme Court ruling occurred.
Renovating the holiday let during lockdown

The Covid-19 pandemic has hit the hospitality and leisure industry hard. Landlords with furnished holiday lettings have been unable to let their properties for considerable periods of time as a result of national and local lockdowns.
Properties need regular maintenance and refurbishment, and while being in lockdown is not ideal, it does provide a window in which to undertake repairs and generally refresh and improve the property. Where expenses are incurred during a period for which the property is unavailable for letting, are the associated expenses deductible in computing the profits or losses of the furnished holiday business?
General rule
Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.
Impact of property closure
It will generally be the case that repairs and refurbishments are undertaken while the property is not let – no one wants to rent a holiday home to find they are sharing it with builders.
Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. Consequently, where the furnished holiday let is closed during lockdown, a deduction should be forthcoming for expenses incurred in this period.
However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during lockdown and undertaking the work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.
Repairs v improvement
Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot in computing profits.
When to tell HMRC about your new business

Lockdown restrictions have forced many businesses to close temporarily. Selling goods or clothes on sites such as eBay and Depop offers the opportunity to raise some much needed cash in these difficult times.
What are the associated tax implications and do you need to tell HMRC about it?
Badges of trade
There is a difference between occasionally selling an unwanted item and running an online business. When selling items online, it is necessary to consider whether you are actually trading. The courts have looked to the ‘badges of trade’ to answer this question. These are indicators that taken together provide an overall impression as to whether a trade exists.
The badges of trade are as follows:
- profit-seeking motive — an intention to make a profit indicates trading;
- the number of transactions – systematic and repeated transactions indicate trading;
- the nature of the asset – an asset that it can only be turned to an advantage by sale suggest trading;
- existence of similar trading transactions or interests – transactions that are similar to those of an existing trade may themselves be trading;
- changes to the asset –repairing, modifying or improving the asset to make it more easily saleable or saleable at a greater profit indicates trading;
- the way the sale was carried out – selling the asset in a way typical of trading organisations suggests trading;
- source of finance – selling the asset to repay funds borrowed to purchase it may indicate trading;
- interval of time between purchase and sale – a short interval of time between purchase and sale may indicate trading;
- method of acquisition – assets acquired by inheritance or as a gift are less likely to suggest trading.
There is no single overriding factor that provides conclusive proof that a person is trading; rather it is a question of forming an overall impression by considering the badges of trade.
Trading allowance
Even if the sale of goods amounts to a trade, it not always necessary to tell HMRC about it, or pay tax on any profits.
The trading income allowance removes the need to tell HMRC about trading income where the gross annual income from one or more trades is £1,000 or less for the tax year. If you are self-employed and sell goods on eBay as a side line, it is not possible to use the trading allowance for the side line if income from your main trade is more than £1,000 – you must report both to HMRC.
What to tell HMRC
If your gross income from all trades that you carry out is more than £1,000, you must tell HMRC about your income and expenses on your self-assessment tax return (registering for self-assessment first if you are not already registered).
In working out your profit you can either deduct expenses wholly and exclusively incurred in connection with the trade or, if more beneficial, the £1,000 trading allowance. Deducting the allowance will generally be more beneficial if expenses are less than £1,000. However, as the deduction of the allowance cannot create a loss, if after deducting actual expenses there is a loss, it is better to deduct the actual expenses rather than the allowance so you can benefit from the associated loss relief.
If your profits are high enough, you may also need to pay Class 2 and Class 4 National Insurance contributions. For 2020/21, you will need to pay Class 2 National Insurance if you profits from self-employment are more than £6,475 and Class 4 if your profits are more than £9,500.