LAM05020 - Apportionment rules: Summary of three main apportionment rules: commercial allocation

Where apportionment is required between BLAGAB and non-BLAGAB the rules are set out separately for the I-E calculation and for trade profits.

The I-E apportionment rules in FA12/S97-101 determine the appropriate income/credits, losses/debits, chargeable gains/allowable losses and expenses apportioned to BLAGAB and brought in to the I-E calculation at steps 1-5 of FA12/73 (LAM05040).

The trade profits apportionment rules in FA12/S114 -115 split the accounting profits and tax adjustments between the BLAGAB and non-BLAGAB trade profit computations (LAM05110).

Diagram showing application of apportionment rules in determining I-E and trade profits

These apportionment provisions are referred to as ‘commercial allocation’ in S98 and S101 (for I-E apportionment) and S115 (for profit apportionment). As the name implies, the intention is that the apportionments reflect the underlying commercial position.

Although the methods for income, gains and trade profits have their own distinct provisions, there is an overriding requirement that there must be consistency between them (S98(5)(a), S101(5)(a) and S115(4)). Consistency does not require an identical approach to be applied across the various allocation methods, but the overall effect of the methods taken together must be fair.

Income and gains may not contribute to trade profit as there is an offsetting movement in liabilities. However, the income and gains would be included within the I-E calculation.

For example, if:

  • income from assets held to support guarantees is allocated to a particular group of policies for the purposes of identifying amounts to be included in the “I-E” computation, then
  • identification of the BLAGAB-element of any chargeable gains on the disposal of those assets should also have regard to the subset of policies to which they relate (rather than being calculated on some less granular basis, such as mean policyholder liabilities).

Significantly different allocation bases for income and chargeable gains purposes would suggest that more work is needed to develop an allocation basis that meets the consistency requirements of FA12/S101(5).

Methods are ‘acceptable commercial methods’ if they fairly reflect the:

  • amounts referable to BLAGAB for a period of account (in the case of BLAGAB income, losses and expenses) – S98(3) LAM05040
  • (in relation to BLAGAB chargeable gains) the contribution of the assets to the company’s BLAGAB chargeable gains S101(3) – LAM05100
  • (in respect of trade profits) the contribution made by each of BLAGAB and other long-term business to the overall accounting profits and tax adjustments (FA12/S115(2) LAM05110)

Overall, a method that is fair will reflect the underlying commercial position, taking into account the company’s own systems for identifying policyholder returns and measuring the profitability of the products and any other relevant commercial information used by the company.

There are (unused as at June 2018) regulation-making powers within FA12/S98(4), S101(4) & S115(3) that would allow, in particular cases, for specified allocation methods to be either prohibited or required.