LAM07210 - Trade profits: BLAGAB trade profits: deduction for current and deferred policyholder tax: FA12/S106

An adjustment is made in the BLAGAB trade profit computation for current and deferred policyholder tax. In essence this provides a deduction for tax borne by a life company on behalf of its policyholders. There are two elements to the adjustment:

• current tax – a tax deduction is allowed under FA12/S106 for an amount equal to the amount of corporation tax charged at the policyholders’ rate of tax on the policyholders’ share of the I-E profit for the period. The figure for current tax is taken from the tax computation
• deferred tax – a tax adjustment is made under FA212/S107 for the movement in the deferred policyholder tax balance for the period

Deferred tax reflects differences between taxable profit and accounting profit (that is, timing differences) or other differences between balance sheet carrying amounts and corresponding tax values (other temporary differences).

The deferred policyholder tax adjustment for trade profit computation purposes is calculated as:

• the closing deferred policyholder tax balance for the period, less
• the closing deferred policyholder tax balance for the previous period

If the amount is a negative figure it is brought into account as an expense in the BLAGAB trade computation.

If it is a positive figure it is brought into account as a receipt in the BLAGAB trade computation.

Credit balances, that is, deferred tax liabilities, are taken to be negative figures for the purposes of this calculation, while deferred tax assets are treated as positive figures.

The amount must be calculated in accordance with GAAP and be reflected in the accounts for the period as income or expense in a performance statement. Performance statements include the profit and loss account and the statement of total recognised gains and losses under UK GAAP, and the income statement or statement of comprehensive income under IFRS.

The amount must also be wholly attributable to policyholder tax. See LAM07220 for details of what expenses, gains and losses are regarded as being attributable to policyholders.

Note that the closing balances used for this calculation are not necessarily the same as the deferred tax balances shown in the company’s accounts. The accounting balances will include both shareholder and policyholder deferred tax items so the company must carry out an analysis to establish the elements attributable wholly to policyholder tax.