Captive insurers: controlled foreign companies (CFCs): funded accounting: tax rules: time limits for enquiries, returns and payment of dividends where it is not established whether the non-resident company is a CFC
ICTA88/S754AA applies where it is not established whether the captive using funded accounting is a CFC. This may be because it is not certain that the captive will be subject to a lower level of taxation than if it were a UK resident. It may therefore be necessary to amend a return submitted on an incorrect basis. This will usually be where the return states that the captive will not be subject to the CFC rules, but in the event it turns out that it is. In this case the UK company is required to amend its return within 18 months and 30 days of the closure of the fund. Where the acceptable distribution policy (ADP) applies, the dividend will still have to be paid within 18 months of the replacement of the technical provision, and be subject to enhancement if paid more than 18 months after the end of the accounting period. The ADP exemption was repealed by FA09/SCH16 Part 1 for accounting periods beginning on or after 1 July 2009.
Failure to make the amendment within the further 30-day time limit will mean the UK company is liable to a tax-related penalty under FA98/SCH18/PARA20 for making an incorrect or uncorrected return (SI1999/1408 Regulation 6).
The enquiry windows are unaltered by this amended time limit. The normal time limit for the original return is 12 months from the filing date, and two years from the date of the replacement, or deemed replacement, of the technical provision.
In the example in GIM11110 of a CFC with a two-year funded account, the time limits would be the same except that if the UK company needed to amend its return to reflect the fact that the basis on which the original return was made was incorrect, it would have until 13 November 2003 to do so. This is 18 months and 30 days after the date of the replacement of the technical provision.
If the CFC had a four-year funded account, the deemed date of the replacement of the technical provision is 31 December 2003. If the basis on which the original return was submitted turned out to be incorrect, the UK company has 18 months and 30 days after this date, that is 30 July 2005 to amend the return.
If the UK company fails to amend the return and apportion its profits within the prescribed period it will be liable to a tax-related penalty, as above. This will need to be pursued by the normal CTSA enquiry procedure (if the enquiry window is still open) or a discovery assessment (if it has elapsed).