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HMRC internal manual

General Insurance Manual

Taxation of the investment return: investment gains: accounting periods beginning on or after 1 January 2002: transition from realisation basis: change of accounting basis

FA98/S44 and FA98/SCH6 governed the computation of profits where a business changed its accounting basis before FA02/S64 came into force. FA02 extended these provisions to cover the situation where a business, without changing its accounting basis, changed the way in which it accounted for something for tax purposes, affecting in particular the change from realisation basis to mark to market for portfolio investments of general insurance companies.

FA02/S64 and FA02/SCH22 provide a comprehensive set of rules in these circumstances. They ensure that profits and losses are neither counted more than once nor left out of account. In particular FA02/SCH22/PARA8 applies in the situation where general insurance companies change from realisation basis to mark to market for portfolio investments. Any difference between the fair value at the start of the first new basis period following the change, and the cost of the asset, is not recognised in full in the first period of change, as would be required by the general rule in FA02/SCH22/PARA2. Instead it is brought into account only when the asset is disposed of.

As an alternative, FA02/SCH22/PARA9 provides that the company may make an election to bring the difference arising on all the assets affected by the change into account in six equal amounts, spread over the first period of change and the five subsequent periods.