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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: General Insurance Reserves (Tax) Regulations: disclaimers

Regulation 8: section 107(4) elections

FA00/S107 (4) allowed a general insurer to elect to reduce its tax deduction to less than the full amount of its accounts provision for unpaid liabilities. The election enabled a company to reduce or eliminate additions to taxable profits that would otherwise arise as a result of section 107. If a company based its tax deduction on a discounted best estimate of future liabilities, there will then be no later additions to profits if the figure is accurate to within 5%, or at least much smaller additions than if the tax deduction is based on undiscounted accounts reserves.

The taxpayer could elect to disclaim more than the amount needed to arrive at a discounted best estimate or indeed the whole provision, in which case later adjustments would almost certainly be in the taxpayer’s favour. The company could not elect to increase, for tax purposes, the amount of the provision in the accounts, even if the accounts provision was discounted at a higher rate than is required by the regulations. However, if the election resulted in additions to profits which were then covered by group relief, losses brought forward or carried back, or loan relationships or intangible fixed assets losses, then any deficiency arising in a later period of account would be adjusted. This was so that Exchequer interest is not paid where no tax was paid on the additions to profits arising as a result of the election. See GIM6290 on Rule 8A.

Regulation 8 was amended by the 2003 regulations. Previously it was made as part of the company’s CTSA return. Now, it had to be in writing, and specify the period of account for which the disclaimer was made. For example, an election disclaiming all or some of the accounts provision for the 2003 period of account must separately have identified the provisions for the liabilities for 2000 to 2003 for whose provisions were being disclaimed, and the currency in which these provision were made.

The time limits for making an election corresponded to the normal CTSA time limit. That is, the first anniversary of the filing date, or 30 days after the completion of an enquiry or an amendment to an enquiry or an appeal. This time limit was extended for insurers who use funded accounting to two years from the date of closure of the fund (see GIM4160 for how this was to be interpreted). The same result was achieved for a Controlled Foreign Company that used funded accounting, by amendment of the time limit in ICTA88/SCH24/PARA4 (2). An election could be made by a UK parent company of behalf of its CFC.

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Disclaimers before the year end

Regulation 8 did not state the earliest date at which an election to disclaim part of a provision could be made for a period of account.

That date could not however be before the provision had been calculated, which could not be until the period of account had ended. In strictness, the provision did not become final until the director(s) had explicitly indicated their agreement to it by signing the accounts.

For practical purposes there was no objection to an election at an earlier time, so long as that was after the period of account to which it related had ended. Elections made before the period of account to which they relate were not acceptable.