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HMRC internal manual

Lloyd's Manual

Syndicate accounts: taxation: transfer pricing

For accounting periods beginning after 31 March 2004, Finance Act 2004 applies the ‘transfer pricing’ provisions of ICTA88/SCH28AA to UK-UK transactions. International Manual (INTM431000) has guidance on the application of Schedule 28AA (see LLM10000). Details are available in a memorandum agreed between HMRC and Lloyd’s, and published by Lloyd’s as an annex to the Lloyd’s Market Bulletin Y3672 of 14 November 2005. Click here to see the memorandum.

The rules apply where a person participates directly or indirectly in the management, control or capital of another person (or where both ‘affected persons’ are under the same control), in cases where a potential tax advantage is conferred on ‘affected persons’ from transactions that are not made at arm’s length. The‘advantaged person’ may be required to adjust their price for the transaction to an arm’s length provision, and a ‘compensating adjustment’ may be required for the ‘disadvantaged person’.

The legislation will only apply in a limited range of circumstances in the Lloyd’s market. A syndicate is not a person and is not itself subject to the rules. Members do not usually participate in the management of a managing agent, and unaligned members (LLM1060) generally are unlikely to be connected to a managing agent. Smaller corporate members are likely to be excluded by virtue of the exemption in the legislation for small and medium-sized enterprises. In the Lloyd’s context the rules are therefore most likely to apply to transactions of a syndicate managed by a managing agent that is connected with a large corporate member as part of an integrated Lloyd’s vehicle.

The sums potentially affected are likely to be fees and profit commission charged, and expenses (including expenses from connected service companies, coverholders and brokers) recharged by managing agents to members of the syndicate.

The standard Lloyd’s agency agreement between managing agents and members requires equity of treatment between aligned and unaligned members, and that expenses must be necessary and reasonable. These rules may be modified in the case of aligned syndicates, but Lloyd’s still exercise some scrutiny over the charges levied. Lloyd’s rules also prohibit connection between managing agents and brokers, although it is possible for them to be connected for tax purposes.

There are likely to be relatively few cases in which the legislation will be invoked. Where it does apply, the adjustments made at member level and in the managing agent or other connected company may have effect for tax purposes in different periods, because of the effect of the declaration basis (LLM4060).

The RITC paid by one syndicate to another is required by Lloyd’s rules to be fair and equitable to both sets of members and is likely therefore to meet the arm’s length rule. The provision made by a single-member corporate syndicate is not a transaction for the purposes of the legislation.