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yourtax by R. H. Grinnsley BCom, FIAC
6. Tax treatment of insurance, education and expenses
Insurance
THE general rule is that premiums for insurance are an allowable expense for tax purposes, while the proceeds of claims are taxable in some suitable way so as to leave the company with no tax-free profit.
(a) Claims for repairs to damaged vehicles will be offset against the cost of repairs. If the insurance was not enough to meet the full amount of the repairs, the excess repair cost is an allowable expense.
(b) Claims for vehicles totally destroyed will be treated as equivalent to selling the vehicle for the amount of the claim, and this will be matched by a corresponding adjustment to capital allowances just like any ordinary sale.
(c) Claims settled by insurance company direct to third parties, as for example for damage to property or personal injuries, and employer's liability and public liability, will not appear in the haulier's books and will not affect his tax liability. He will simply have taken tax relief on the premiums.
Damaged goods
(d) Where customers claim successfully against the haulier for goods lost or damaged in transit if the insurance is not enough to cover the whole claim, the difference will be an allowable business expense.
(e) The proceeds of a theft or fire claim in respect of goods in the haulier's own premises will be set against the cost of replacements. A similar claim for equipment which has been taking capital allowances will be treated the same way as vehicles. However, it could happen the claim is for more than the original cost and the excess could then be taxable as a capital gain.
(f) If the haulier's premises are destroyed by fire the claim will be treated as equivalent to a sale. It is quite probable the amount could be much more than the original cost which will create a taxable capital gain. In this case the roll-over deferment rules may counteract the tax liability if a replacement building is bought within 12 months.
Comment—it is sound business practice to insure adequately against a wide variety of risks, and tax relief on the premiums encourages this habit. There are no unfair tax penalties on the proceeds of claims though at the same time there is no chance of making tax-free profits out of the claims.
Life insurance on directors and employees is more complex and needs a more detailed study than is within the scope of this present article.
Licences
All kinds of licences for vehicles are an allowable expense for tax purposes.
Technical education
Contributions towards the cost of technical education at universities and technical colleges are allowable as a business expense. This includes not only the fees and expenses of employees attending for full-time or part-time education but also payments towards the current costs, capital expenditure and research expenses of the colleges.
Two very interesting queries have arisen on this topic. The first was the case of Wickwar v. Berry in which the college fees for the taxpayer's own son were in dispute, as the inspector said these were a personal expense of the taxpayer, not of the business. The decision went in favour of the taxpayer.
This means that where the son of the owner or director of the business is planning to take his place in the firm, it is perfectly in order for the business to meet the costs of his technical education. To avoid any doubt about the youngster's intentions it could be useful if he had been paid as a part-time or temporary employee, for
example during school holidays after the age of 16, so that he had established a definite connection with the business. However, this is not absolutely essential.
Management education The second query arose with one of my acquaintances whose inspector of taxes said that management education was not "technical". As the young man was being trained for senior management in his father's company and in view of the recent advance in technical aspects of management, the refusal appeared most unreasonable. After some lengthy discussions and pressure from the trade association (it was not in road haulage) the inspector gave way and allowed the item without the need for a court case.
Surely, formal training and skill in personnel management, management accounting, commercial law, road traffic law, and so on, are just as essential and as technical as vehicle maintenance?
Interest payments
Restrictions on tax relief for loan interest payable by individuals were introduced in 1969 and as yet the Conservatives have not remembered their election pledge to cancel them. However, they do not form any obstacle to borrowing for business purposes.
For a limited company the interest, except on bank overdraft, continues to be payable net after deduction of income tax and the income tax has to be passed to the collector. This means that the true cost is the gross figure of the interest and this amount is allowable as a deduction from total profit for corporation tax purposes, being extracted and treated separately from the routine business expenses.
It will be noted that this makes loans a more attractive source of business funds than share capital because the loan interest is allowable while the dividend on shares is taken from profits remaining after corporation tax.
In the accounts of a sole trade or partnership, the interest is now generally payable gross and is entered directly among the business expenses.
Next week: Capital allowances in taxation.