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HMRC internal manual

General Insurance Manual

From
HM Revenue & Customs
Updated
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Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): tax treatment: enquiries

Enquiry may be justified where a financial (re)insurance contract is accounted for on the basis that premiums and claims are revenue items, and the effect of this accounting treatment is to defer the recognition of profit, but there is no significant transfer of underwriting risk. High risk cases will in general be those where the UK company is the cedant under a reinsurance contract to a reinsurer in a tax haven. Significant resource input may be needed to establish the facts before the technical arguments can begin.

Depending on the particular facts, suitable arguments are likely to include:

  • Reported profit is not in accordance with the relevant accounting standards.
  • Premiums paid are capital in nature because they produce an asset or advantage of enduring benefit to the trade.
  • Accounts do not disclose the ‘full amount of the profits’ for the year under the Taxes Acts. Generally accepted accounting practice is important in arriving at the ‘full amount’ of chargeable profits, but

    • these principles must yield to a contrary rule of law
    • the question of what is the generally accepted practice is determined on the evidence, and a particular professional view is not conclusive
    • in this connection, professional evidence is descriptive and it is then for HMRC (and ultimately the Tribunal) to form an understanding and decide upon the consequence - BIM31000 gives more detail on the relationship between tax and accountancy.
  • The premiums payable are disallowable under ICTA88/S74 (1)(l), re-enacted as ITTOIA05/S106 and CTA09/S103. This prevents a deduction for amounts recoverable under an insurance or contract of indemnity. It may, on the facts, be either explicit or implicit that all premiums will be returned to the cedant company and are so are eventually recovered. This argument was used with success against unacceptable rent-a-captive arrangements. Under these schemes, commercial concerns paid premiums to insurance companies set up in tax havens by insurance brokers on terms such that the taxpayer effectively self-funded a significant first layer of losses, with anything above that being reinsured by the captive into the ordinary insurance market.
  • The premiums payable are disallowable under ICTA88/S74 (1)(a), re-enacted as ITTOIA05/S34 and CTA09/S54. These ‘wholly and exclusively’ arguments may be relevant to deductibility of payments by a non-insurer to a captive. They may also apply where the reinsurer and cedant are affiliated, or there is some other reason to suppose that the parties are not at arm’s length. The cedant may know that the premium was set at an unrealistic level compared with the anticipated risks, so that the reinsurer was practically certain to make a profit. If so, arguably one purpose of the transaction was to benefit the reinsurer. Alternatively, if risk is retained within a group, it may be that the only apparent benefit is a tax saving. If so, a purposive construction of the legislation, applied to a realistic view of the facts, may suggest that certain steps might be deprived of significance for fiscal purposes. AAG will advise, and must be contacted before an appeal goes to Tribunal.