Taxation of general insurance: UK GAAP and International Accounting Standards
UK GAAP and the true and fair view
General insurers are subject to FA98/S42, which applies to all trading companies except for life business and Lloyd’s corporate underwriters: these have their own rules. The original requirement was for Case I profits to be computed “on an accounting basis which gives a true and fair view”, but FA02/S103 amended the wording in section 42 to incorporate generally accepted accounting practice (GAAP) and introduced a new section 836A into ICTA which provided a definition of that term.
International Financial Reporting Standards (IFRS) and reporting fairly
ICTA88/S836A was repealed by FA 2005, having been replaced by FA04/S50, which revised the legislation to deal with International Accounting Standards. Companies adopting IAS (as is permitted, but not required, by an EU Directive/Regulation) became subject to the requirement to ‘report fairly’, but the Financial Reporting Council, the UK’s independent financial reporting regulator, made clear that the ‘true and fair view’ remained a cornerstone of financial reporting in the UK. It follows that the requirement that computations of Case I profits must be in accordance with a true and fair view is maintained in a case where IFRS is used.
UK GAAP applies to the computations submitted by branches of overseas insurers, and the HMRC view is that this has been so for many years. Even before the changes described above a ’true and fair view’ had been required by UK company law, which in practice meant in accordance with UK GAAP, though this was not always so - see GIM2030. The topic of non-resident general insurers is covered in detail at GIM10000+.
Case I principles thus apply to general insurance as they do to other trades, but with some adaptations to the particular circumstances of insurance. Notably:
- The surplus arising from mutual insurance activities is not a taxable profit. Mutual general insurers are assessed on investment income and chargeable gains, but there is no set off of any underwriting losses or of the general expenses of running the business. Details are at GIM9000+.
- Provisioning rules are different. The normal UK accounting standard FRS 12 does not apply, and there is special company law - see GIM2030. There is a focus on prudence in setting technical provisions and some special rules for ‘equalisation provisions’. These topics are dealt with at GIM6000+ and GIM7000+
- There is a number of provisions which apply generally to financial traders, those where a profit on dealing in certain types of investment asset is a trading receipt, and this includes general insurers. But some of these provisions specifically exclude general insurers, notably ICTA88/S95. See GIM5050.