LAM14030 - Finance Act 2012 Transitional provisions: The total transitional difference: deemed receipts or expenses: FA12/SCH17/PART1
Up until 31 December 2012, surplus in the regulatory returns provided the base for taxation of life insurance company profits.
From 1 January 2013 taxation is based on the profit in the financial statements in line with other companies. Transitional provisions were required to ensure that all profits were taxed once but once only, on the change of basis.
In the majority of cases there was untaxed profit as at 31 December 2012, which had been recognised as profit in the financial statements but not recognised as surplus in the regulatory return. In a few cases, there will be amounts that need to be removed from the financial statements taxable profit in future years as they have already been taxed as regulatory return surplus.
FA12/SCH17/PART1 sets out the rules for calculating ‘deemed receipts or expenses’ which are the untaxed or unrelieved amounts to be brought into account for corporation tax purposes. These are explained briefly below and in full in the original guidance.
The approach is to compare ‘the 2012 balance sheet’ at 31 December 2012 with ‘the 2012 periodical return’ i.e. compare the balance sheet in the financial statements and the regulatory return, with provision for deemed balance sheets and returns to be put in place if these are drawn up for a different accounting period.
FA12/SCH17/PARA6 refers to the results of that comparison as the ‘total transitional difference’ (TTD). The TTD is then analysed and broken down into component parts, i.e. deemed receipts and expenses. Each component is either an ‘excluded item’ (FA12/SCH17/PARA7) or a ‘relevant computational item’ (RCI).
The RCIs are allocated between BLAGAB, non-BLAGAB and PHI. RCIs for PHI are ignored but for BLAGAB and non-BLAGAB the resulting amounts are treated as taxable receipts or expenses in the relevant trade profits computation arising evenly each year over a ten year period from 1 January 2013, with certain exceptions FA12/SCH17/PARA11-15.
The exceptions to the spreading period above relate to ‘relevant court protected items’ where there is a court order preventing distribution of surplus. The date for spreading commencing in these cases is the later of the day the court order ceases to be in place or 1 January 2015.
In most cases the last year of deemed receipts or expenses will be 2022. A simplified example of the comparison is set out below:
| Description (Asset/(liability)) | FSA return (£) | Balance Sheet (£) | Difference |
| Rec/(Exp) (£) | ||||
|---|---|---|---|---|
| Mathematical reserves/technical provisions | (50) | (60) | (10) | |
| with-profit fund Form14.51/ FFA or UDS | (300) | (220) | 80 | |
| Other | 20 | 0 | (20) | |
| Total Transitional Difference | 50 |
| Allocation to BLAGAB and NON-BLAGAB | BLAGAB | Non-BLAGAB | Total £ |
|---|---|---|---|
| Allocated according to rules in FA12/SCH17 | 10 | 40 | 50 |
| Spread over 10 years – annual amount taxable | 1 | 4 | 5 |
There are specific provisions which can result in the spreading being brought to an end and all the remaining amounts being brought into account. This can happen if a business is transferred under an insurance business transfer scheme (unless it is a relevant intra-group transfer) – and more detail is given at LAM13040. If a business ceases, other than through an insurance business transfer scheme, then any remaining deemed receipts or expenses are brought into account in the period of cessation (FA12/SCH17/PARA15).
The calculation of the total transitional difference often required detailed discussion to deal with varying circumstances between insurers. The detail of the calculations is therefore of dwindling historical interest.