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HMRC internal manual

General Insurance Manual

Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: section 107 FA 2000: excesses and deficiencies

FA00/S107 (1) to FA00/S107 (3) required an amount calculated by reference to interest to be treated as a receipt or expense of the trade where it becomes apparent in a later period that technical provisions were excessive or insufficient. An amount treated as a receipt is referred to in FA00/S107 (2) as an ‘excess’ and an amount treated as an expense is referred to in FA00/S107 (3) as a ‘deficiency’.

The rules operated by hindsight. In each later period (beginning on or after 1 January 2001, but not if it ends on or after 19 July 2007) it was necessary to look back at the provisions set in each earlier period for liabilities arising for the first time in that period (the ‘original provisions’). If, as a matter of fact, the original provisions exceeded the discounted amount needed to settle the liabilities, an adjustment needed to be made in the tax computations for the later period. Unlike the previous approach to taxing reserves, no judgement was needed to determine whether or not the reserves set at the time met the Owen v Southern Railway of Peru criteria (see GIM6080). Under FA00/S107, the tax deduction for the earlier period was repeatedly recalculated in each later period, because the ‘discounted amount needed to settle the liabilities’ in any later period included the provisions still outstanding at the end of that later period. As time passed and the liabilities were increasingly paid, it became apparent how accurate the original tax deduction was.

Subject to an election under FA00/S107 (4) (GIM6180), an increase in the provisions themselves continued to be a deductible expense of the trade (and a decrease a trading receipt). The guidance in GIM6120 (exchange gains and losses) applied for periods beginning before 1 October 2002, and for later periods, FA96/S100 (11)(a) had the same effect.