Insurance proceeds

Accounts and tax treatment

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Following a fire at company premises, one of their machines was destroyed. They have received insurance proceeds to replace the machine, just checking on the accounting/tax treatment of the transaction. 

Existing machine has NBV in the accounts of £300k but the replacement machine is £500k so they received £500k and purchased the new machine. 

New machine will sit in FA's and capital allowances will be claimed (AIA is not available in this instance as limit has already been reached)

Existing machine disposed of in the accounts, should the receipt of insurance proceeds of £500k be posted to profit on disposal creating a gain of £200k (deducted on tax comp) or as other income? If the first option, this amount would then be treated as disposal proceeds for CA purposes making it tax neutral. If it is the latter, the company would be worse off as the whole £500k would be subject to CT in the year but the £500k addition would only be subject to tax relief on the WDA's?

Replies (11)

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RLI
By lionofludesch
17th Dec 2020 12:03

I still think you've sold a machine for £500k and bought another for £500k.

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By GW
17th Dec 2020 12:32

I agree with Lion, You've sold the wreck of the old machine to the insurer for £500k - I expect you'll find they are entitled to any scrap value. Then you've used £500k to but a new machine.

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Replying to GW:
Psycho
By Wilson Philips
17th Dec 2020 13:25

I'm not sure that I agree with either.

OP says that the machine was destroyed. I would treat its destruction as a loss of £300k. I would then treat the £500k insurance receipt as a contribution (albeit 100%) towards the cost of a new machine.

Tax-wise, no difference. Accounts-wise, no asset on the balance sheet (which in my view is correct since it didn't cost the business anything).

Having said that, I'm not certain that either treatment is prescriptive - it might come down to the wording on the insurance paperwork.

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By SA2016
17th Dec 2020 13:06

Thanks both so it is profit on disposal of assets with the proceeds posted as proceeds on taxcomp?

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By Bobbo
17th Dec 2020 13:42

Is this useful?

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca23250

Suggests that for capital allowances purposes that insurance proceeds is the disposal value.

Agree with Wilson's point re wording of the insurance being key.

Was there a need to actually buy a new machine to claim £500k from insurer or could the business have done what it liked with the £500k, as the old machine had been insured up to replacement cost value?

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Replying to Bobbo:
Psycho
By Wilson Philips
17th Dec 2020 15:33

I agree - subject what the insurance document said, it is probably more likely than not that the insurance proceeds should be treated as disposal value. So I am tending now to agree with the previous respondents.

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Routemaster image
By tom123
17th Dec 2020 13:49

Surely, somewhere, the company is £200k better off than it was, so that must be a gain of some sort?

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Replying to tom123:
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By Truthsayer
17th Dec 2020 17:57

No, as there is no cash gain. Seeing it purely from a tax point of view, the net effect is merely to improve and renew a non-cash asset. By opting for a new-for-old policy, they have already (sort of) paid for the upgrade in the form of higher insurance premiums compared with those of a old-for-old policy.

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Replying to Truthsayer:
RLI
By lionofludesch
17th Dec 2020 18:03

It's better off in that it has a newer machine than it used to have.

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By frankfx
17th Dec 2020 15:18

No asset on the balance sheet.
Or net book value nil?

The purpose of the insurance is to put you back to where you were.
Delorean .
Bank /finance company may well have loans secured on the asset.

And resecure on replacement asset.
Note to the accounts required on security and nature.
Substance over form.
True and fair.
Business is insuring and housing and feeding the asset.to produce an economic return.
Financial statements should not be misleading.
Wire card, Patisserie Valerie Delorean Motor Corporation aside.

All point in direction that the asset should feature on the balance sheet.
Not ' off balance sheet'.

Other views appreciated.

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