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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Taxation of general insurance: funded accounting: general

GIM2140 and GIM2150 explain the accounting background to funded accounting and its relation to the underwriting year basis of reporting profit. It will not be found in UK insurance accounts from 2005, except (in modified form and along with annual accounts) in Lloyd’s syndicate accounts, or in the accounts of some corporate Names - paragraphs 82 and 83 of the December 2005 ABI SORP omit the reference to funded accounting formerly found in the corresponding paragraphs of the 2003 SORP. LLM2020+ gives further details, explaining that 3 year syndicate underwriting year accounts are retained in some cases although the members may agree to dispense with them. Annual accounts must be drawn up in all cases, where appropriate, as an alternative.

For pre-2005 accounting periods, although 3 year funded business accounting was in accordance with UK GAAP for UK companies, it was not followed for tax purposes. The statutory override is sections ICTA88/S8 (3) and ICTA88/S70 (1). Corporation tax is charged for a financial year on profits arising in that year. There may have been some cases where a particular historical practice governed the basis on which a company was taxed, but the normal rule was that the company waited until the end of Year 3 to finalise its Year 1 profits. It was not a case of assessing the profits of Year 3 in Year 1.

This reflected the statement in the 1998 ABI SORP that the recognition of profit is deferred until the underwriting year is closed, and is consistent with company law. Before closure, an amount equal to the excess of premiums over claims and expenses was simply carried forward as a balancing item, in place of a calculated provision, as explained at GIM2140 and GIM2150. Financial statements prepared on a three year funded basis reflect the results of three underwriting years, including the underwriting year result closed at the end of the accounting period which began three years earlier. Final profits of the underwriting year, were not therefore ascertainable until after a delay. Companies in most cases therefore made a return for Year 1 at the end of the first year of the fund. This would normally have reflected an underwriting profit of nil, unless the result was expected to be a loss, in which case the loss was recognised in the accounts.

When the fund was closed at the end of (generally) Year 3, the final result was substituted for the estimated figure presented in Year 1.

Other practices were in use, including the preparation of a “memorandum account” on annual underwriting year or accident year basis. These are now statutory requirements for UK companies. See GIM4180.