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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: section 107 FA 2000: disclaimers

FA00/S107 (4) allowed an insurer to elect to disclaim any part of the technical provisions for any period of account, (not just the original provisions) and the computations of the next period to be ‘adjusted accordingly’. The effect of such an election was that the profits of the period for which the disclaimer was made were increased by the amount disclaimed. In the following period of account, unless the insurer elected again to disclaim the same provisions, the amount disclaimed in the previous period was deducted in the computations. GIM6390 gives more details on elections, and GIM6400 sets out an example of the effect of an election. See GIM6290 for an explanation of the modification of amounts to be treated as deficiencies under FA00/S107 (3) where a FA00/S107 (4) election was made.

An insurer did not permanently lose any amount disclaimed. FA00/S107 (4) states that where an election is made “…the profits of his trade for the next period of account shall be adjusted accordingly for the purposes of any computation for tax purposes”. So the lower tax deduction was brought in as a credit in the following year’s tax computation in place of the full accounts reserve brought forward. The election only affected the timing of deductions and the FA00/S107 calculations.

This election gave considerable flexibility to general insurers enabling them to maximise reliefs by moving deficiencies between years and this began to give rise to unintended loss of tax. A review concluded that FA00/S107 should be repealed in entirety, but subject to a transitional provision. This was a fair balance between Exchequer concern (loss of tax) and industry concern (the complexity and administrative burden of the legislation).

Repeal of section 107 FA 2000 - transitional provision

FA07/SCH11/PARA5 in general repealed FA00/S107 with effect for periods of account ending on or after 19 July 2007. See GIM6150. But FA07/SCH11/PARA5 (4) contains a transitional provision allowing a restricted election for the first period of account ending on or after 19 July 2007 (‘transitional period’) and repeal of FA00/S107 (4) and therefore no election for subsequent periods.

The election was limited to 10% of the technical provisions for the transitional period (FA07/SCH11/PARA5 (6)). The time limit for making the election (see GIM6390) was unaffected.