The Medical Defence Union – insurance premium rebates not taxable receipts

In The Medical Defence Union Ltd v HMRC [2021] UKUT 249 (TCC), the Upper Tribunal (UT) has held that adjustments to an insurance premium were not taxable, as the refunds were mere adjustments to member contributions.

Background

The Medical Defence Union Ltd (MDU) provided certain benefits to medical professionals, such as indemnity cover against professional negligence claims, which were paid for by a mutual fund. Its member subscriptions were used to maintain the mutual fund. MDU leveraged its buying power in contracting with third-party insurance companies, thereby securing more favourable terms for its members. These terms included a reduction in subsequent premiums where previous claims were lower than expected.

The reduced insurance premiums were made available to the members by way of a partial refund, which was added to the mutual fund for the members' benefit.

HMRC was of the view that the refunds returned to MDU were taxable receipts as contractual cash payments from the insurer to MDU.

MDU appealed to the First-tier Tribunal, which found that the partial refunds were taxable. MDU appealed to the UT.

UT decision

The appeal was allowed.

The UT found that the partial refunds received by MDU should be treated as if they were repaid to the members themselves. This was because the payments were held to be adjustments to the previous member contributions, as opposed to new payments to MDU. The insurers were, in effect, returning sums received from the members, such that the members retained a greater proportion of subscriptions than initially expected. 

The UT commented at [69]:

"This was not a situation analogous to the investment return generated on an investment of the MDU’s mutual fund which derives from a separate investment activity (a return which it is not disputed is taxable). Rather, it involved a payment back of part of the very sums that had originally been paid over to the Insurer by the members. The MDU’s dealings with the Insurer did not, in our judgment, result in it undertaking a separate activity with the Insurer. Instead, because the claims outcome, and therefore the return to the Insurer, could not be forecast with certainty at the outset, the PEA provided a mechanism to adjust the aggregate premium paid at a later date to arrive at an agreed level of return".

Comment

This case demonstrates the importance of determining the exact relationship between a mutual fund and its members in order to assess the tax implications for insurance premium rebates. Of particular interest is the discussion of the mutuality concept at paras [48]–[78], which provides a detailed analysis of the law in this area. Taxpayers will no doubt be pleased that the UT has provided some clarity on this complex issue.

The decision can be viewed here.