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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: tax adjustments to premiums or claims

The equalisation reserve calculations are based on FSA return figures. These generally correspond with those in the shareholder accounts, which are the starting point for the tax computation of trading profits. Sometimes, though, the accounts figures need to be adjusted for tax purposes.

Premiums received may, for example, be adjusted under the transfer pricing legislation; a deduction for a reinsurance premium payment may be wholly or partly disallowed; or the figure for outstanding claims may be adjusted (see GIM6000, for example under FA07/SCH11).

In general, such adjustments do not feed through into the equalisation reserve calculations, and do not affect the tax deduction or addition relating to the reserve transfers. This is because the tax adjustments are explicitly linked to amounts that are transferred in accordance with the equalisation reserves rules by ICTA88/S444BA (2).

Similarly, where the tax calculations are not based on the regulatory return, either because there is no return, or because there are special circumstances which require a separate set of calculations for tax purposes, the figures to be used are those that appear in the accounts on which the tax calculations are based. The reason for this is that the tax legislation refers, in these circumstances, to the reserve which would have been required by virtue of the equalisation reserves rules had they applied to the company.

Generally the relevant insurance legislation and the guidance either requires or strongly encourages the use of the same figures in regulatory returns and in shareholder accounts which (in all but the most exceptional of cases) will be unaffected by the changes required in tax computations. Therefore, the figure for premiums and claims used in computing movements in the equalisation reserve using the method described in the equalisation reserves rules will in most cases be the same as those in the financial statements which are used as the starting point for the tax computations, not the adjusted figures.