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HMRC internal manual

International Manual

Controlled Foreign Companies carrying on general insurance business: Approved funding method and maximum length of fund

ICTA88/S755B(1) - (2)

Special rules apply where a controlled foreign company carrying on general insurance business in an accounting period for which an apportionment falls due, makes use of an approved basis of funded accounting. These rules allow a company using an approved method of funded accounting to compute its chargeable profits on closure of the fund but, where the fund is longer than would be allowed under United Kingdom company law, it is required to treat the fund as closed at an earlier date. An approved method is one which:

  • complies with paragraph 52 of Schedule 9A to the Companies Act 1985. This provides for a technical provision to be made in accounts which is replaced by a provision for estimated claims outstanding no later than three years after the end of the year in which the business was written, or
  • would comply with the above paragraph, except that the replacement of the technical provision is permitted after a period of more than three years following the end of the underwriting year.

A controlled foreign company with a five year fund may therefore still benefit from the special provisions as long as the method of closing that fund complies with the above. The special rules will only apply where the fund is closed not later than three years after the end of the underwriting year. If it is not closed at that point then it must be treated as closed, so that chargeable profits are calculated as if the fund had closed at a time permitted in the United Kingdom. It should be noted that there is no requirement to prepare statutory accounts using a maximum of four year funds but, for the purpose of computing chargeable profits, it should be assumed that the funds are the permitted maximum length. In practice most companies, unless local law forbids, are likely to ensure that accounts are prepared using a fund of permitted length to avoid complicated calculations.

Where a fund is treated as closed, the deemed technical provision should not exceed the amount which would have been deductible from profits if the fund had actually closed on that date and the appropriate technical provision made.

Where an approved method of funding is not used then the company must compute its chargeable profits on an annual basis.