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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: anti-avoidance

ICTA88/S444BA (7) and ICTA88/S444BA (8) are anti-avoidance provisions which give HMRC the right to rewrite the equalisation reserve where arrangements have been made or transactions have been entered into solely or mainly to obtain a tax benefit. HMRC staff should make a submission to CT&VAT (Technical) Insurance Group where it appears that an unintended tax advantage is being obtained - see the ‘Technical Help’ link on left bar.

It might, for example, be possible for a group to maximise relief for equalisation reserves by arranging for more volatile business to be diverted away from a company that has reached its reserve ceiling. If that were to happen a transfer into the reserve of the recipient would be vulnerable to attack under ICTA88/S444BA (7) to the extent that it was triggered by premiums referable to the diverted business. A risk assessment pointer may be a reserve sticking at its maximum level, particularly if this is associated with changes in the mix of business that the company writes, or in the pattern of claims development.

The tax advantage in the GIM7340 example will not be apparent on the face of the equalisation reserve computation for the first company, it being necessary to look at a group’s affairs as a whole in order to detect the existence of possible avoidance arrangements.