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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Equalisation reserves: the tax rules: funded accounting

A company may report its results to the regulator using a non-annual (or funded) basis of accounting. For periods beginning on or after 1 January 2005, all UK Companies Act accounts, on which the tax computations are based, are prepared on an annual basis, although non-annual accounting may be encountered in relation to foreign domiciled companies within the UK corporation tax charge. GIM4140 explains the general tax treatment of non-annual accounting, but special consideration is needed for equalisation reserves.

Where non-annual accounting is followed for tax purposes, the taxable profit for a particular underwriting year is not determined until that year ‘closes’. The equalisation reserve transfers shown in the regulatory return (or calculated in accordance with the equalisation reserves rules) for a particular financial year (see GIM7210) are treated as additions to or deductions from the trading profit for the tax accounting period which corresponds to that financial year.

For example, for the financial year 2007, there may be a net transfer out of the reserve of £500,000. This amount will be added to the trading profit for the accounting period ended 31 December 2007 even though that cannot be computed until the 2007 underwriting year closes at the end of, say, 2010. Where tax computations based on non-annual accounts are adjusted in the way described at GIM4140 by the inclusion of estimated figures so as to enable the tax computations to be finalised once the return figures for a particular year are available, the equalisation reserve transfers shown in the return for a financial year fit naturally into the tax computation for the same accounting period. No adjustment or apportionment is needed unless the two periods are not coterminous. And if they are not, the equalisation reserve transfers will be apportioned in the same way as described in GIM7210.