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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: funded accounting

FA00/S107 applied to general insurers using funded accounting in the same way as it did for other general insurers. The technical provisions were compared with the discounted actual cost of settling those provisions. The only complication was in ensuring that claims were assigned to the correct period.

Under three-year funded accounting, for example, the profits shown when the fund closed at the end of year 3 were taxed in year 1. The correct figure for the technical provision at the end of year 1 was the figure shown as the ‘provision for unpaid claims’ at the end of year 3, PLUS the claims actually paid in years 2 and 3. This is because at the end of year 1 those claims had not actually been paid. This figure was the starting point for the section 107 calculations.

The same principle applied in all later years until the liabilities were settled. Any profit crystallising in year 4 was assessed as a profit for year 2. For section 107 purposes, the provision at the end of year 4, PLUS the claims actually paid in years 3 and 4, formed the technical provision for year 2. This was the figure to be compared with the technical provision at the end of year 1. The section 107 calculation then proceeded with the comparison of the discounted provision for year 2 AND the discounted cost of claims paid in year 2. If this was less than the starting provision for year 1 (subject to the 5% margin), an interest charge was applied to the excess and the result added to the profits for year 2.