LAM04110 - Calculating ‘E’ adjusted BLAGAB management expenses: Step 2: Spreading of acquisition expenses: FA12/S79

The income a company earns from long-term business acquired in year 1 will be received over a period of years, and companies are normally required, by accounting standards, to spread the cost of acquiring business over a period of years.

The FA12/S79 adjusted amount of acquisition expenses referable to an accounting period, is spread for tax purposes over seven years. This spreading for tax will differ from the accounting position.

The adjusted amount of acquisition expenses is calculated as follows

• take acquisition expenses included at Step 1 of FA12/S76.
• deduct “any amount of re-insurance commission or any repayment or refund (in whole or in part) that forms part of an I-E receipt of the company for the accounting period as a result of section 92”.
• deduct acquisition expenses incurred in the accounting period which are reversed within the accounting period. Any amounts reversed are effectively taxed by being deducted in this way FA12/S79(9).

Only 1/7th of the adjusted amount of the acquisition expenses referable to an accounting period count as management expenses of the period. For example, step 2 of the FA12/S76 calculation deducts 6/7 of the adjusted amount. For this first period 6/7ths is deducted, regardless of the length of the accounting period.

For each of the next 6 accounting periods (provided each is a year in length) FA12/S76 treats a further 1/7th as deemed BLAGAB management expenses at step 3. If a succeeding accounting period is less than a year, the amount to be treated as deemed management expenses for that accounting period is proportionately reduced.

Any expenses reversed in an accounting period or a preceding accounting period do not count as deemed expenses for that accounting period. In other words, once acquisition expenses are reversed they cease to qualify for relief both in the accounting period in which they are reversed and in any later accounting period.

Example of spreading of acquisition costs involving reversed costs

Adjusted acquisition costs incurred in AP20x3 are £70,000. Under step 2 of the FA12/S76 calculation, only £10,000 is deducted as a management expense in 2013. The remaining 6/7ths are spread and deducted in the next 6 periods under step 3 as deemed management expenses (see LAM04200). In 20x5 £7,000 of these costs are refunded. The adjusted acquisition costs are therefore £63,000 and so the amount allowable in each period (for 2015 and beyond) as a deemed management expense is £9,000. £2,000 of the costs allowed in earlier APs (the cumulative difference between £9,000 and £10,000 for 2013 and 2014) needs to be reversed under Step 4 of FA212/S76 (see LAM04300).

Steps	20X3	20X4	20X5	20X6	20X7	20X8	20X9
Step 1: Ordinary BLAGAB management expenses of the period that are acquisition expenses	70,000
Step 2 adjustment: reduce by 6/7 of acquisition expenses	(60,000)
Step 3 adjustment: bring in brought forward acquisition expenses	10,000	9,000	9,000	9,000	9,000	9,000
Step 4: reversed expenses claimed in earlier APs		(2,000)
Net BLAGAB management expenses	10,000	10,000	7,000	9,000	9,000	9,000	9,000