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HMRC internal manual

General Insurance Manual

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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: General Insurance Reserves (Tax) Regulations: example of a calculation

An example of a FA00/S107 calculation is set out below. The example shows an original reserve in respect of future liabilities of £5000 and gradual payments of claims and releases from reserves over the following ten years. It shows the amount of the recalculated provision at the discount rate of 2.79% specified for liabilities arising in 2000, and assumes an interest rate of 5.07% (the interest rate for 2001) throughout the period in which adjustments arise. In practice the interest rate will vary from year to year (see GIM6310).

Example

1 2 3 4 5 6 7 8 9
                 
Year Prov’n Paid Prov’n + Paid Recalc Provision Margin Cumul. Excess Excess this year Add to profit
      2 + 3 4 * discount 5% *       
5 £5000 -              
(5 + 6) 7(cy) -              
 7(py) 8 * int              
2000 5000              
2001 4000 800 4800 4680 234 86 86 3.1
2002 3000 800 4600 4396 220 384 298 21.2
2003 2500 400 4500 4232 212 556 172 18.3
2004 2000 400 4400 4085 204 711 155 22.0
2005 1500 400 4300 3954 198 848 137 24.3
2006 1000 400 4200 3838 192 971 122 26.0
2007 800 150 4150 3776 189 1035 66 16.4
2008 600 150 4100 3720 186 1094 59 16.8
2009 400 150 4050 3669 183 1148 54 17.2
2010 300 50 4000 3623 181 1196 48 17.0

Commentary

A number of points assist in understanding the above table.

In each year the amount of the recalculated provision is the sum of the amount of the provision set at the end of that year, plus the amount of any claims paid in that year and in all earlier years.

This figure is then discounted up to the date of payment. In the case of the closing provision this is the end of the period. In the case of claims paid it is assumed that these are paid on average at the mid-point in the year. Companies were free to use the actual date of payment or another average date if they have the information to justify this.

So, for example, the recalculated provision of £4396 for 2002 represents the sum of the provision of £3000 (discounted from 31/12/00 to 31/12/02), plus the discounted cost of £800 claims settled in 2001 (assumed to be settled 30/06/01), plus the discounted cost of the £800 claims settled in 2002 (assumed settled 30/06/02).

This discounted amount is compared to the original £5000 reserve, and the 5% margin deducted. The result is the cumulative excess. The cumulative adjustments in previous intervening years were then deducted to arrive at the adjustment for that year.

This figure x 3.675% (5.07% x 70% - reflecting the fact that an interest charge would normally be an allowable deduction from profits), compounded for the relevant number of years, gives the actual tax addition.

The above table provides the addition required in respect of year 2000 liabilities. Similar calculations are needed for the liabilities of 2001, 2002 and so on. The sum of all these is the amount of the tax adjustment in any later period of account.

Some firms developed their own spreadsheets for use by their clients. It was intended that the rules should operate in a fairly mechanical fashion. In most cases insurers and their agents prepared the calculations using spreadsheets or similar software.