​HMRC’s stance: Are BI pay-outs taxable?

When receipts are taxable

As a general rule under HMRC guidance, if the insurance premiums for business interruption insurance were deductible as a business expense, then any pay-out under the policy should normally be treated as taxable trading income.

In practice, for most small or medium UK businesses, BI premiums meet the “wholly and exclusively” test and are deductible when computing trading profits.

Timing of including the pay-out

• If you prepare accounts on a cash basis (common for small unincorporated businesses), the pay-out should be recognised in the accounting period when it is received.

• If you prepare accounts on the accruals basis (typical for companies), the receipt should be matched to the period to which the interruption relates — for example, the original shutdown period. However, if the pay-out was uncertain at the time, the key date may be when you became certain the payment would be made.

When BI pay-outs might not be taxable

Although the above is the default position, there are some limited situations where a BI pay-out may not be taxed as trading income.

For example, if the premiums were not deductible (because they failed the “wholly and exclusively for trade” rule), then the proceeds might not automatically be subject to income or corporation tax.

However, tax law on insurance recoveries can be complex. According to HMRC’s internal guidance (for example, under manual BIM40751), some insurance recoveries aimed at compensating for lost profits are treated as “trading receipts” — meaning taxable income.

In short: if you claimed the cost of your BI premiums as a deductible business expense, you should expect a pay-out to count as taxable income.

What recent developments mean for claims (2025/26)

While the tax treatment of business interruption insurance pay-outs remains governed by long-standing HMRC guidance, the wider context of BI claims has changed over recent years. Notably, many UK businesses affected by pandemic-related closures have revisited their policies.

Court rulings in 2024 (notably the decision in the Financial Conduct Authority (FCA) test case, and subsequent appeal decisions) clarified interpretation of “at the premises” disease- and shutdown-related clauses. As a result, more policyholders are now eligible to claim BI pay-outs for closures, including those due to public authority orders or disease outbreaks — events that many insurers had previously excluded.

For 2025/26:

• If your policy wording includes disease, public authority, or prevention-of-access clauses — or you previously had a claim rejected — it may now be worth revisiting your position.

• If you receive a pay-out under such a revised claim, you should expect that BI pay-outs will remain taxable (assuming premiums were deductible).

Given the evolving legal landscape and potentially higher volumes of BI claims, accurate documentation of interruption periods, financial losses, and related expenses is more important than ever.

How Trueman Brown can help you with business interruption insurance

If you’re unsure how a business interruption insurance pay-out affects your tax position — or whether you should revisit a previously refused claim under new 2025-legislation/court guidance — then we can help.

Contact mark@truemanbrown.co.uk or call 01708 397262 for straightforward, expert advice. Our team can:

• review your BI policy wording for disease-, public-authority or prevention-of-access clauses,

• help you assess whether a pay-out should be treated as taxable income,

• guide you on how to reflect the receipt in your accounts (cash basis or accrual).

Don’t let uncertainty over taxation or recent legal changes deter you from making a legitimate claim — we’ll help you navigate it.

FAQ about business interruption insurance

Q: If I claimed my business interruption insurance premiums as a deductible expense, do I always have to pay tax on a pay-out?
A: Generally yes — HMRC treats most BI pay-outs as taxable trading income when premiums were previously deducted.

Q: Does it matter if my business uses cash-basis accounting or accrual accounting?
A: Yes. Under cash basis, the pay-out is taxed in the period you receive it. Under accruals basis, it must be matched to the period when the interruption occurred (or when payment certainty was established).

Q: I had a BI claim rejected in 2020 — should I revisit it now?
A: Possibly. Recent 2024 court rulings have broadened interpretation of disease, public-authority and prevention-of-access clauses. It’s worth having your policy wording reviewed.

Q: Are there any circumstances where a BI pay-out is not taxable?
A: Only in limited cases — for example, if the insurance premium was not deductible because it failed the “wholly and exclusively for trade” test. But these cases are rare; in most ordinary business situations, pay-outs are taxable.

Q: Who can help me assess my BI policy and tax obligations?
A: That’s where we come in. Contact us at mark@truemanbrown.co.uk or 01708 397262 and we’ll guide you through it.