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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Reinsurance and other forms of risk transfer: tax issues

Most reinsurance transactions are entered into for the commercial reason underpinning insurance contracts generally, namely to spread risk. However, the reinsurance market is a global one and provides the opportunity to move funds or profits from high tax to low tax territories. The flexibility of the reinsurance contract also makes it possible to present as reinsurance transactions whose economic substance is different. This could be that of a loan or a deposit, as in the case of the more extreme forms of financial reinsurance or alternative risk transfer (ART): see GIM8180.

Insurers are required to provide information about their major reinsurers or cedants in the regulatory return (see GIM3180), although significant amounts may be below the reporting limits. Both inwards and outwards reinsurance (reinsurance accepted and ceded) are potential risk areas.

Occasionally, information obtained in the course of enquiries will point to the avoidance (or even evasion) of tax in a foreign jurisdiction. Some of the UK’s double tax treaties (such as that with the USA) provide for the exchange of information relevant to the administration of anti-avoidance provisions. Where it appears information may be useful to another authority a report should be sent to Business International with a request that it be looked at by the competent authority. Similarly, the competent authority may be able to assist in cases where it is thought that information from another fiscal authority would assist an enquiry.

Any unusual form of reinsurance may give rise to tax risk. As with any such case, it is first necessary to establish the full facts and to consider the use of statutory powers to obtain information where appropriate. Investigation of suspected avoidance risks requires application of the same techniques and skills as other enquiry work. This includes a willingness to bring enquiries to a speedy conclusion as soon as it becomes apparent that no avoidance is involved and that the UK tax consequences of an arrangement are in fact correctly dealt with in the insurer’s computations.