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HMRC internal manual

International Manual

Controlled Foreign Companies carrying on general insurance business: Equalisation reserves

SI1999/1408 Regulation 7

ITCA88/S444BA allows insurance companies carrying on business in the United Kingdom a deduction against trading income for transfers into an equalisation reserve, while transfers out of such reserves are brought into the computation as additional profits. Regulation 8 of the Insurance Companies (Reserves) (Tax) Regulations 1996 (SI1996/2991) allows a controlled foreign company to establish on its balance sheet a reserve that it would be required to make if it were carrying on insurance business in the United Kingdom. Transfers into and out of the equalisation reserve are then taken into account in computing the trading profits.

Some controlled foreign companies, like some United Kingdom companies, may choose to draw up their statutory accounts on a funded basis but prepare accounts on an annual basis for computing chargeable profits. As is the case with United Kingdom companies which follow this practice, the equalisation reserve that is then allowable in arriving at chargeable profits must also be calculated on an annual basis. This is covered by Regulation 7 of the Non-resident Companies (General insurance Business) Regulations 1999 (SI1999/1408) which introduces a new regulation 8A into the Insurance Companies (Reserves) (Tax) Regulations 1996 (SI1996/2991), thereby ensuring that the rules on equalisation reserves for United Kingdom companies apply in the same way to controlled foreign companies.

A controlled foreign company will not be able to obtain a deduction for an equalisation reserve where it uses funded accounting in its calculation of chargeable profits and leaves the fund open beyond the end of the third year following the close of the underwriting year. Regulation 7(8B) therefore simply ensures that the controlled foreign company is in the same position as a company carrying on insurance business in the United Kingdom since such companies, as explained in INTM256460, cannot keep a fund open beyond this period.

HM Revenue & Customs will apply the equivalent reserve rule with a degree of flexibility, with the aim of not penalising mistakes of the kind that might occur in the operation of the section 34A ICA 82 regulations that regulate equalisation reserves (such as rounding errors or minor computational mistakes). If however mistakes are made it is important that they are rectified as soon as possible, so that the reserve is restored to proper equivalence with an equalisation reserve.