Taxable Insurance receipts spread over life of period covered

Taxable Insurance receipts spread over life of...

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Company gets an insurance payout for loss of gross profit which covers a period of 12 months from date of loss.

Payments are made almost immediately and at intervals as no dispute about loss amounts. A final settlement amount is agreed and paid for the whole of the 12 months period covered which still has some time to run. The insurance period of 12 months straddles two financial/tax years with the payments all falling within the one tax year.

The question is this. For accounting purposes we reflect it in the financial year when received. For yax purposes can we reflect the receipt over the 12 months, that is two  tax years? The tax effect is the same either way but the tax payment liability is now spread ove two years. An obvious advantage.

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By Steve Kesby
09th Aug 2012 13:37

Tax treatment follows accounting treatment...

... subject to any rule of law to the contrary.

But why is the accounting treatment to recognise the income only when received?

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Replying to b.clarke:
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By richardterhorst
10th Aug 2012 16:30

Its recognised in the YE even when paid 12 days after YE

Accounting treatment allows for a future payment when known and if wthin a short period after YE (12 days in this case) to be incorporated into this financial year (In this case ending June 2012).

The client wants it in the June 2012 year as it finishes the rather traumatic year off and as accounting treatment allowed, why not. However the final payment was for the period covered to end November when the insurers liability period ends.

The insurer therefore settles for the whole period on an assumed loss.

Now it would be nice for tax cash flow planning if for tax purposes I can allocate 5/12 of the final sum to the following tax year.

Over the 2 years it will be tax neutral.

The client and insurers had already agreed the form of settlement with the final figure agreed the week after the YE and payment 4 days afterwards.

As I expect HMRC to hassle me on all the accounting entries am dotting plentu i's and crossing plenty t's. This is one of them.

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By eastangliantaxadvisor
09th Aug 2012 14:07

I had this not so long ago!

 

We knew, from the insurance broker, the period that the compensation was for, which in our client's case was to compensate him for the period from the date his factory was burnt down, up to the date he expected to re open the factory.

 

That being the case, we included the insurance proceeds over the accounting period, spreading in accordance with the assessors best estimate as to what period and quantum it related to.

 

As an example, a larger amount related to the period straight after the fire, a smaller amount towards the end as he was able to genreate income (though not so profitabiltiy) by outsourcing.

 

 

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By eastangliantaxadvisor
10th Aug 2012 19:50

As I said in my ealrier post, the taxed treatment will follow the accounting treatment - so here - in your example - if it is pro rated on a time basis - 5/12 would be to the following period.

 

But.... I would say, it would be possbile, like in my example, to allocate on a diffetent basis, if you can justify the argument like I could with mine!

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