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HMRC internal manual

General Insurance Manual

Captive insurers: controlled foreign companies (CFCs): funded accounting: risk assessment

Identification of CFCs is part of the risk assessment process. Awareness of the special time limits which apply to CFCs which use funded accounting is particularly important. The enquiry window for the original return of the UK company will be the 12 months following the filing date. There is a further enquiry window of two years following the replacement of the technical provision. The UK company has 12 months from this date to amend its return, so the Revenue has at least 12 months to enquire into the amendment.

If the company’s intention changes or a distribution is not pursued, the company has 18 months and 30 days from the date of the replacement of the technical provision to amend its return. The enquiry window remains open for two years from this date, so the period in which the Revenue can enquire into the amendment may be as little as five months. Risk assessment procedures will need to ensure that the window does not close before any necessary enquiries are made.

In the case of a CFC with an accounting date of 31 December 2000 and a four year funded account for the 2000 underwriting year, the enquiry window will be two years from the date of replacement of the technical provision, namely 31 December 2005. If the company fails to make an acceptable distribution it has until 30 July 2005 to amend its return, namely 30 days after 18 months after 31 December 2003.

Discovery assessments may be made where it is discovered that a UK company’s return is incorrect in relation to the application of CFC rules. If the UK company has made a declaration that the CFC is exempt because it has pursued an acceptable distribution policy it is straightforward to check whether the distributions are paid.

The acceptable distribution policy exemption was repealed by FA09/SCH16 Part 1 for accounting periods beginning on or after 1 July 2009.