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HMRC internal manual

General Insurance Manual

From
HM Revenue & Customs
Updated
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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: example

For calendar year 2000, a company receives premium income of £1000 and pays out claims and adjusts the fund as follows. This example uses a three-year fund which runs off over 7 years. The example shows only the profits of a single year. In practice the accounts will have shown the profit of a number of years and the figures needed to be separated out for tax purposes to give profits or losses of each year.

Year Premiums received Claims paid Fund Provision Profit
           
2000 1000 200 800    
2001   150 650    
2002   100   400 150
2003   75   250 75
2004   50   150 50
2005   40   70 40
2006   50     20
2007          

For tax purposes other than FA00/S107, the fund closed in 2002 and profits of £150 were taxed as profits of 2000. This figure was substituted for the estimate made at the time the 2000 return was submitted. The profit of £75 in 2003 was taxed as a profit of 2001; the profit of £50 in 2004 was taxed as a profit of 2002; and so on.

For FA00/S107 purposes, no calculations were made in 2000 or 2001. In 2002 the claims paid in 2001 and 2002 (£150 and £100 respectively) were added to the provision of £400 at the end of 2002 and the resulting figure of £650 was the figure of ’original provisions’ for the 2000 period of account. This was the starting point for the regulation 3 calculations in later periods of account. Any part of this could be disclaimed under FA00/S107 (4), and it could be disclaimed at any time from the end of 2001 onwards.

In 2003, the discounted values of the claims of 2002 and 2003 (£100 and £75) were added to the discounted value of the provision of £250 at the end of 2003. The sum of this (£425) gave the new provision for claims outstanding for the liabilities of 2000. The discount rate applied was that of the 2000 period of account (2.79%), and the discounted closing provision was £413. Together with the discounted value of claims paid in 2001 of £150 (£148 assuming mid year payment), this was the cost of settling liabilities of 2000 at the end of the later period of account (2001). The regulation 3 calculation required a comparison of this with the original provisions of £650 to give the difference, which (subject to the 5% margin) was multiplied by the appropriate interest rate (and x 70%) to give an addition to the profits of 2001.

The rest of the calculations proceeded on the same basis. At the end of 2004, the discounted value of the claims of 2003 and 2004 (£75 and £50 respectively), were added to the discounted value of the provision made at the end of 2004 (£150) to give the new provision for the liabilities of 2000. Together with the discounted value of the claims paid in 2002 (£100) this was compared with the original provisions of £650, to give the addition to profits in 2002. The last period for which a section 107 calculation was made is 2006, in respect of the claims paid in that year.

The following table summarises the section 107 adjustments for the period of account ending 31 December 2000, in each later period of account.

AP Adj’d prov’n* Claims            
Paid** Disc’d prov’n Disc’d claims Cost of settling Margin Excess Add to profit    
                 
2000 650              
2001 425 150 413 148 561 28 61 2.2
2002 275 100 260 96 504 25 60 4.5
2003 160 75 147 70 461 23 45 5.2
2004 90 50 81 45 439 22 23 3.6
2005 50 40 44 35 438 22 2 0.4
2006   50   43 437 22 1 0.2

*The adjusted provision is the sum of the following:

2000 Provision at end of 2002 (£400), plus claims of 2001 (£150) and 2002 (£100)
   
2001 Provision at end of 2003 (£250), plus claims of 2002 (£100) and 2003 (£75)
2002 Provision at end of 2004 (£150), plus claims of 2003 (£75) and 2004 (£50)
2003 Provision at end of 2005 (£70), plus claims of 2004 (£50) and 2005 (£40)
2004 Claims of 2005 (£40) and 2006 (£50)
2005 Claims of 2006 (£50)

** Claims paid were the actual amounts paid in each period of account.