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HMRC internal manual

Life Assurance Manual

Calculating ‘E’ adjusted BLAGAB management expense: Step 1: Definition of ordinary BLAGAB management expenses, conditions and excluded amounts: FA12/S77

FA12/S77 defines ordinary BLAGAB management expenses referable to an accounting period. This definition is expanded in S81 and certain restrictions are introduced in S82.

Conditions to be met for an expense to be an ordinary management expense are summarised in the table below and this diagram.

Conditions for ordinary management expenses FA12/S77(2) Details
Condition 1 Debited in accounts in accordance with generally accepted accounting practice
Condition 2 Expenses of management of the company’s long-term business referable to BLAGAB in accordance with s98 (commercial allocation)
Condition 3 Not ‘excluded amounts’

Condition 1, which covers amounts debited in either the profit or loss account/income statement or the other comprehensive income statement is subject to FA12/S77(3). FA12/S77(3) provides that in a case where acquisition expenses (as defined for tax purposes) incurred in the accounting period are spread into the accounts drawn up for successive periods of account, those expenses are treated as if they were all debited in the accounts drawn up for the first of those periods of account.

Acquisition expenses (as defined for tax purposes, see LAM04100) are ordinary management expenses of the accounting period in which they are incurred in the first period in which any part of them is debited in the accounts. Therefore, any spread amount in the accounts must be reversed out. Step 2 (see LAM04100-04120) requires 6/7ths to be deducted from this amount, leaving 1/7th as deductible ordinary management expenses in the period they are first incurred. The remaining 6/7ths will be spread over the following six periods as deemed management expenses.

Expenses must be referable to an accounting period. Expenses relating to a period of account coinciding with, or falling wholly within, an accounting period are all referable to that accounting period, unless there is a specific rule to the contrary, e.g. pension deductions under FA04/Part4. (FA12/S77(8)).

Expenses relating to a period of account which only partly coincides with an accounting period must be apportioned: only the amount apportioned to the accounting period on a time basis in accordance with CTA10/S1172 is referable to the accounting period. (FA12/S77(9)).

Condition 2 requires the amount debited in the accounts to be an expense of management. There is no statutory definition of an expense of management. The case law related to what qualifies as an expense of management applies to life companies as it does to a company with investment business- see CTM08150 onwards.

When calculating the step 1 amount the expenses deductible under other relevant rules are ignored. An expense is deductible under another relevant rule (FA12/S78(2)) if it is deductible: under FA12/S92(3) (expenses deducted in calculating BLAGAB deemed I-E receipts- see LAM03500); in calculating the profits of a property business; or in calculating the income from letting of mineral rights in the UK under CTA09/S272.

Excluded amounts (FA12/S77(4))

The following “excluded amounts” are not ordinary BLAGAB management expenses: 

  • amounts of a capital nature (this is the general rule but it may be overridden if express provision is made in the legislation).
  • reinsurance premiums.
  • refunds of premiums.
  • profit commissions and profit participations (however described).
  • commission or other expenses in excess of what a company could reasonably be expected to pay if it were chargeable to tax as a trade under s35 CTA 2009 and normal trading rules applied.
  • non-commercial amounts payable (amounts payable to the extent to which they are incurred for a purpose other than a business or other commercial purpose).
  • amounts payable in connection with a policy or contract to a policyholder or annuitant or any other beneficiary under the policy or contract (including a deceased person who fell into those categories) and any person acting for such persons (including any deceased person who acted for such persons). But if an insurance company is a policyholder under a policy, any amounts payable to the company are not excluded amounts by virtue of FA12/S77(4)(g) although the other exclusions may apply.   

Commission arrangements may be structured so as to give the introducer of the business (or cedant in the case of reinsurance) a share in the profits of the business. This may be explicitly described as a profit commission or profit participation or be implicit in the nature of collateral and/or side arrangements. However they are described or structured, payments which are profit related are excluded amounts.