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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: insurers not regulated in the UK: non-statutory reserves: tax relief for UK companies trading outside EEA

Regulation 8 of the tax regulations applies where a UK registered company carries on business wholly outside the EEA and so is not covered by the regulatory requirement to maintain reserves. Nevertheless, as a UK incorporated company it will be resident in the UK for tax purposes and it will pay UK tax on its world-wide profits. Such a company will not be required to show an equalisation reserve in its Companies Act accounts. This regulation provides that a company which carries on the whole of its business outside the EEA will be entitled to tax relief provided it maintains an equalisation reserve equal to the amount which would be maintained by virtue of the equalisation reserves rules. If the company at any time fails to operate the reserve in accordance with regulatory rules then the whole of the balance of the reserve will be deemed to have been transferred out of the reserve immediately before the end of that accounting period.

Where reserves are accounted for in a company balance sheet in a currency other than sterling, regulation 8(3) of the tax Regulations provides that the balance is to be translated into sterling at the London closing exchange rate on the last day of the accounting period. The special rules which apply to credit insurance business (GIM7120), mutual business (GIM7360), non-annual accounts (GIM7220) and waiver of deductions for equalisation reserves (GIM7250) all apply to equivalent reserves. This rule overrides the provisions of FA93/S92 to FA93/S92E which might otherwise apply.