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HMRC internal manual

General Insurance Manual

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

Full details on changes of accounting basis are set out at BIM34001+. In general, where there has been a change from one valid accounting basis to another, and as a result a profit or loss is recognised in the period in which the change is made, the profit or loss should be included in the computations for that period.

Prior year adjustments may arise where appropriate accounting treatment under the ABI SORP (Statement of Recommended Practice) changes during the course of a contract. HMRC normally accepts the insurer’s accounting practice for time and distance and similar policies, and it would not be appropriate to argue that an accounting and tax practice followed in earlier years was not a valid one following a change. Generally HMRC will treat such changes as being from one valid accounting basis to another, even though the companies may have been obliged to make the practice change. For time and distance policies the effect of recognising the prior year adjustment for tax purposes will normally be to decrease profits or increase losses.