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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Repeal of equalisation reserves tax legislation for accounting periods ending on or after 1 January 2016: Introduction

This section sets out the taxation consequences arising from the removal of the regulatory requirement for general insurers to maintain equalisation reserves.

Built-up reserves held at 31 December 2015 are to be released in equal instalments over a transitional 6 year period, subject to an election to accelerate receipts under FA12/S26(4) – see GIM7440.

One-sixth of an insurance company’s existing equalisation or equivalent reserve will be taxed as a receipt of the company’s business in each of the six calendar years beginning with the calendar year 2016. See FA12/S26(4).

If the company has more than one accounting period in any of the transition years, FA12/S26(5) specifies that the amount to be taxed is apportioned between the accounting periods in proportion to the number of calendar days falling in each.

Example

The example is based on the following scenario:

  • Company A draws up its accounts to 31 March
  • As at 31 December 2015 it had equalisation reserves of £6m.
  • No elections are made.

 

Under the FA12 rules Company A will be taxed on its reserves of £6m equally over a period of 6 calendar years, meaning £1m per calendar year.

For the accounting period ended 31 March 2016 an amount of £250,000 (£1m x 3/12) will be taxed representing the 3 month period to 31 March 2016.

For the accounting period ended 31 March 2017 an amount of £1m will be taxable. This represents;

£750,000 for the period 01 April 2016 – 31 December 2016 and

£250,000 for the period 01 January 2017 – 31 March 2017.

 

Insurance companies can elect to accelerate the receipts, see GIM7440.