LAM04500 - Calculating ‘E’ adjusted BLAGAB management expenses: Example steps 1 to 5: FA12/S76

This is a simple example to illustrate the way the steps work.

In the year to 31st December 20X5 Lifeco A’s income statement showed accounting debits of £90,000 for items that qualify as expenses of management. This included £11,000 of accounting debits related to tax acquisition expenses (both amortisation of pre-20X5 and 20X5 acquisition expenses). In 20X5, tax acquisition expenses of £21,000 were incurred and first amortised in the accounts. The ordinary BLAGAB management expenses in Step 1 are calculated as follows:

	£
Accounting debits for expenses of management	90,000
Strip out debits for all acquisition expenses	(11,000)
Add-back total amount of 20X5 acquisition expenses	21,000
Step 1: Ordinary BLAGAB management expenses	100,000
Step 2: 6/7ths of the current period acquisition expenses are deducted	(18,000)

Step 3 is to add deemed BLAGAB management expenses. In Lifeco A’s case, these are all brought forward acquisition expenses.

Before adjusting for reversals of acquisition expenses, Lifeco A has spread acquisition expenses from earlier periods falling to be relieved in 20X5 of £5,000. However, there were the following reversals of expenses in 20X5:

	£
Acquisition expenses incurred in 20X3	7,000
Non-acquisition expenses incurred in 20X4	4,000

The reversal of the non-acquisition expense does not affect the spreading of brought forward acquisition expenses. However, the reversal of the acquisition expense incurred in 20X3 means that the amount of acquisition expenses to be reversed is reduced by 1/7th of £7,000, i.e. £1,000. This gives a Step 3 total of £4,000 (£5,000 less £1,000).

Step 3: Deemed BLAGAB management expenses 4,000

Step 4 is to deduct reversals of expenses, insofar as relief has been obtained for them in an earlier period, and to deduct the amount of BLAGAB trade losses utilised otherwise than against BLAGAB trade profits of the period.

The deduction for reversals is as follows:

	£
Acquisition expenses incurred in 20X3 (2/7ths)	2,000
Non-acquisition expenses incurred in 20X4 (full amount)	4,000
	6,000

This is because relief for 1/7th of the 20X3 acquisition expenses has been received in each of 20X3 and 20X4. Relief for all the 20X4 non-acquisition expense was received in 20X4.

The balance of the £7,000 acquisition expenses reversal after the 20x5 adjustment of £4,000 will be deducted from the carry forward balance of spread expenses.

Lifeco A surrendered a BLAGAB trade loss of the period of £20,000 as group relief.

Step 4: Deduction for reversals and utilised BLAGAB trade loss (26,000)

Lifeco A carried forward excess BLAGAB expenses from 20X4 of £15,000. These are added at Step 5.

Step 5: Brought forward excess BLAGAB expenses 15,000

The adjusted BLAGAB management expenses are the total of Steps 1 to 5.

Adjusted BLAGAB management expenses for 20X5 75,000

The above can be summarised as follows:

Step	Calculation of adjusted management expenses
Step 1	Ordinary BLAGAB management expenses LAM04030-40		100,000
Step 2	Deduct 6/7ths of acquisition expenses LAM04110		(18,000)
		82,000
Step 3	Add Deemed BLAGAB management expenses LAM04200
	Spread acquisition expenses from earlier periods	5,000
	Less acquisition expenses reversed in 20X5 (1/7 of £7k) LAM04110	(1,000)	4,000
	Basic amount of adjusted management expenses		86,000
Step 4	Adjust for expenses repaid/ reversed in 20X5 LAM04300
	Non-acquisition expenses –deducted in full in 20X3	(4,000)
	Acquisition expenses 2/7 x £7k deducted in 20X3 and 20X4	(2,000)	(6,000)
	Deduct BLAGAB trade loss relieved LAM07310		(20,000)
		60,000
Step 5	Add Management expenses brought forward from 20X4		15,000
	Adjusted BLAGAB management expenses for 20X5		75,000