Repeal of equalisation reserves tax legislation for accounting periods ending on or after 1 January 2016: Transfer of part of the business
In the year of transfer the receipt is apportioned between the part of the business being retained and the part being transferred. This apportionment is made on a just and reasonable basis. For example this could be with reference to reserves or to the lines of business being transferred.
The receipt relevant to the business being transferred is then apportioned between the transferor and transferee on a time basis for the year of transfer.
In subsequent years the appropriate parts of any remaining receipts determined on a just and reasonable basis are treated as receipts of the transferee, and the receipts of the transferor are reduced accordingly.
Where a part transfer takes place and no election is made under FA12/S29 then the run-off of the reserve balance will continue in the transferor as if nothing had happened.
The example is based on the following scenario:
- Company A draws up its accounts to 31 December
- Company B draws up its accounts to 31 December
- No other elections have been made
- At 31 December 2015 Company A had equalisation reserves of £12m.
- Company A has had historical relief for equalisation reserves so for each of the years in the 6 year transitional period, 01/01/2016 – 31/12/2021, it has a deemed receipt of £2m (£12m/6)
- On 1 July 2018 Company A transfers its property damage business to company B.
- On the transfer of the business both Company A and company B make a valid joint election to allocate the receipt between them.
Property damage was a class of business that required equalisation reserves to be maintained – see GIM7030. The accounts of Company A show that property business accounts for 15% of earned premiums but 25% of the claims provision. The remaining 85% of premiums earned and 75% of the claims provision relate to household insurance.
The part disposal means that under FA12/S29(4), the deemed receipt for 2018 and later years will need to be calculated on a just and reasonable basis to reflect the transfer of part of the business. The company must therefore calculate an apportionment based on the specific facts of the disposal. In this example an adjustment in the range of 15% to 25% of the deemed receipt being transferred to Company B following the acquisition of the property damage business would appear just and reasonable. In this case Company A and Company B consider 20% to be a just and reasonable allocation of the deemed receipt.
Deemed taxable receipts for Company A and Company B
Company A has already been deemed to have received a receipt of £2m for each of the years ended 31 December 2016 and 31 December 2017.
The deemed receipt for 2018 and later years will however need to be calculated on a just and reasonable basis to reflect the transfer of part of the business
In 2018 Company A will have a deemed receipt of £1m for the period to 30 June 2014 representing one half of the deemed receipt for the full year and a deemed receipt of £800,000 for the period to 31 December 2018 to represent the 80% of business remaining with Company A for the final 6 months of the year. This gives a total deemed receipt of £1.8m for the accounting period ended 31 December 2018.
Company A will continue to have deemed receipts of £1.6m (80% of £2m) for the accounting periods ending 31 December 2019, 2020 and 2021 when the transitional period ends. This represents the 80% of the business retained by Company A.
Company B will be assessed on a deemed receipt of £200,000 in the accounting period ended 31 December 2018 to reflect its ownership of the property damage insurance book for 6 months of that year.
It will then be assessed on £400,000 (20% of £2m) for each of the accounting periods ending 31 December 2019, 2020 and 2021 when the transitional period ends.