LAM02040 - I-E overview: Charge to Tax on I-E basis: separate businesses/trades: FA12/S66-67

Where an insurer carries on regulated long-term insurance business through a place of business in the UK the special rules in Part 2 FA12 will apply to determine the taxable profits of that business, unless that business consists solely of PHI as defined in FA12/S63.

FA12/S66 introduces the concept of separate businesses, where a company writes both BLAGAB and non-BLAGAB long-term business.

BLAGAB

BLAGAB is a separate business to which the I-E basis applies. The I-E basis has some similarities with the treatment of an investment company, where the profit in the accounts is not the primary starting point for taxable profits. However, the company’s long-term business activities are all essentially trading and, unless the company is a mutual or Friendly Society, there is still a trade profit calculation undertaken. This is only used for specific purposes within the I-E framework, such as the minimum profits test and calculation of the shareholders’ share of profit. Trade profits are also relevant for rules such as offset of losses and group relief.

Non-BLAGAB

All non-BLAGAB long-term business is regarded as a single trade. It will be the only trade if the company does not carry on any BLAGAB business or general insurance business. So, for example, a company carrying on only unit-linked pension business will have a single non-BLAGAB trade. The charge to corporation tax will be under CTA09/S35 as for companies generally. It is only where there is a mix of business that includes BLAGAB that the additional I-E rules have to be considered.

The general rules are modified as noted in FA12/S71 and Chapter 6 to include rules relating to trade profit calculations, trade profit apportionments and transfers of business. The result is likely to be substantially the same as a normal financial trading company computation (e.g. dividends are taxable) LAM07100.

‘Substantially all’ non-BLAGAB

There is an exception to the general rule providing for a separate BLAGAB business in FA12/S67 where ‘substantially all’ of a company’s long-term business is non-BLAGAB.

The policy objective is to minimise the compliance burden of producing BLAGAB tax computations for small amounts of BLAGAB business with small amounts of tax at stake.

There is no set limit for defining ‘substantially all’. The application of this provision will depend on the facts and circumstances in each case. As a general rule, S67 should be applied where the amounts of business are small in absolute terms. This could be measured in terms of liabilities or investment income and gains potentially accruing. The amounts of tax at stake over the life of the policies should be considered before applying S67. For consistency, cases should be referred to BAI before any agreement is reached.

Companies only carrying on PHI business FA12/S72

Companies only writing PHI business (which is long-term business but not life assurance business) are excluded from all application of special long-term business rules.

Companies carrying on PHI and long-term business

The special long-term business rules apply in relation to PHI business written within companies also writing other long-term business. For example, FA12/S111 which brings dividends specifically into the trading computation will apply to dividends allocated to PHI business in the same way as for other long-term business assets. However, such companies are able to take a deduction under CTA09/S400 on index-linked gilts for the index linking on gilts backing their PHI business. For assets backing other long-term business this deduction is removed by FA12/S112 but PHI is carved out of S112.

Protection business

Companies carrying on only long-term protection business as defined in FA12/S62 (business post December 31 2012) are not subject to the I-E charge as such business is excluded from the definition of BLAGAB in S57. Where business is carried on after 31 December 2012 and the company has elected under the transitional provisions to have pre 2013 business taxed as ‘new’ protection then there will be no BLAGAB I-E charge. LAM14040.

Reinsurance business

Reinsurance of BLAGAB business is subject to special rules. See LAM10000 onwards.

Non-insurance activity and insurance which is not long-term business

Regulation generally prohibits insurance companies from carrying on any non-insurance activities. In addition, other than for reinsurance, the regulator no longer grants composite licences to write general (short-term insurance) and long-term business in a single company Short-term insurance business is treated as a separate trade FA12/S66(6). However, as few composites now remain active, life companies are most likely only to have trading activity comprising BLAGAB and/or non-BLAGAB business. In some cases that BLAGAB and/or non-BLAGAB business may include some reinsurance business.