FA2010: risk transfer schemes: calculating the relevant scheme profits
Relevant Scheme Profits
Where a company has made scheme profits (CFM63360) as part of a risk transfer scheme, a proportion of those profits will be available for offset by ‘ring-fenced scheme losses’.
The rules for calculating the amount of profit available for offset by ring-fenced scheme losses are at CTA10/S937F and are calculated using the following formula:
|A -||B -||C|
A = The total of the scheme profits made in the period in relation to the scheme by the members of the relevant group
B = The total of the scheme losses made in the period in relation to the scheme by the members of the relevant group
C= The pre-tax economic profit from the scheme
Pre-tax economic loss
The ‘pre-tax economic profit’ is the overall economic profit that the group makes, as a whole, by virtue of being party to the scheme, and prior to any tax implications.
Using the example at CFM63320, and assuming that sterling has appreciated by 10% against yen, we can see how this works:
A = The profit on the yen borrowing (see CFM63360) = £13.9m
B = £0 (there are no losses made on any loan relationship or derivative contract)
C = The overall pre-tax profit made from the scheme - i.e. the profit on the yen borrowing of £13.9m less the loss made on the shareholding of £10m = £3.9m
So, the relevant proportion of the ‘scheme profit’ that is a ‘relevant scheme profit’ is (£13.9m - £0 - £3.9m) / £13.9m = 71.2%.
As the ‘scheme profit’ was £13.9m, the ‘relevant scheme profit’ is 72% of £13.9m = £10m