Corporate members: stop-loss contracts
(Subject to the anti-avoidance rules described below, this page applies only to stop-loss insurance taken out on or after 6 December 2011)
Prior to FA2012, there was a mismatch between the timing of the tax deduction for premiums payable by a corporate member in respect of member-level stop-loss insurance and the recognition of the profits to which the stop-loss insurance relates. The premiums were deductible under normal accountancy principles whilst the profits were recognised on a declaration basis.
For example, the premium payable in respect of a member-level stop-loss insurance entered into on 1 December 2011 is an allowable deduction in a corporate member’s accounts in computing the profits for the accounting period ended 31 December 2011. However, the profit to which the stop-loss insurance relates will only be recognised in the accounting period ended 31 December 2014.
The Government decided to amend the legislation at FA94/225 to align the deduction of the premiums with the recognition of the corresponding profits. This was achieved by the insertion of subsection 3D in FA94/S225. This amendment provides that any premium which is payable by a corporate member under a stop-loss insurance taken out (on or after 6 December 2011) in respect of its underwriting business will be treated as arising to the member directly from its membership of the syndicate or syndicates in relation to the activities of which it was taken out. It goes on to provide that such premium is to be deducted by the member on the declaration basis.
Stop-loss premiums - Anti avoidance
FA94/S225 (3F) contains a measure to prevent a stop-loss contract being disguised as a quota share contract in order to avoid the tax treatment described above. It provides that where a corporate member of Lloyd’s enters into a quota share contract, whose main or one of whose main purposes is to avoid a deduction of the premium on the declaration basis, the contract will be treated as if it were a stop-loss insurance and any amounts payable under the contract will be treated as premiums under stop-loss insurance. It further provides that the deemed premiums will be taxed on the declaration basis. This provision has effect in relation to any quota share contract entered into on or after 6 December 2011. It is always a question of fact whether the main purpose test is met and if in doubt, advice should be sought from Anti-Avoidance Group (AAG) at an early stage.
Premium payable in respect of two or more underwriting years
FA94/S225 (3E) applies where a premium payable by a corporate member of Lloyd’s under a stop loss insurance policy taken out in respect of its underwriting business relates to two or more underwriting years. The amount of the premium that is to be treated as payable in each of those years is to be determined on a ‘just and reasonable basis’. This phrase has not been defined in the legislation and so takes its ordinary meaning. What is just and reasonable will be determined by reference to the facts of the case.
In practice, corporate members of Lloyd’s enter stop loss policies that either relate to a single underwriting (i.e. calendar) year or a Lloyd’s year of account. In the latter case corporate members should not have any problems in quantifying the premium payable under the policy for the purposes of FA94/S225 (3D).
Example: Company X, a corporate member of Lloyd’s carries on an underwriting business via a Lloyd’s syndicate on which it owns 100% of the participation rights. X Limited takes out a stop loss insurance policy on 31 December 2011 in respect of its participation on the 2012 Lloyd’s year of account. The policy provides for the corporate member to pay a premium to the reinsurer of 40% of the syndicate’s net result for the 2012 year of account in June 2015 following the closure of the year of account on 31 December 2014 and completion of the syndicate accounts.
The syndicate accounts for the 2012 year of account at 31 December 2014 show a net profit of £100m. The corporate member therefore pays £40m to the reinsurer in June 2015 in order to settle its obligations under the stop loss policy. X Limited is able under FA94/S225(3D) to deduct the payment of £40m in its return for the year ended 31 December 2015.
Corporate members may have more difficulty where the stop loss policy relates to a calendar year.
Example: Company Y, a corporate member of Lloyd’s, carried on an underwriting business via a Lloyd’s syndicate on which it owns 100% of the participation rights. The company takes out a stop-loss insurance policy on 31 December 2011 in respect of the year ended 31 December 2012. Its accounts for the year ended 31 December 2012 therefore reflect the movement that takes place during that calendar year on the company’s participation (via its syndicate) on the 2010, 2011 and 2012 Lloyd’s years of account.
The 2012 accounts include an accrual for £500m in respect of the reinsurer’s share of the company’s net earned premium and a total receivable of £450m being the reinsurer’s share of claims and syndicate administrative expenses. The net amount due to the reinsurer of £50m is paid in 2013 on completion of the 2012 annual accounts.
Y Limited will have to allocate the net payment of £50m to the underlying years of account by reference to the syndicate accounts for each year of account. If this process identifies that £30m of the payment relates to the 2010 year of account the balance is split equally between the 2011 and 2012 years of account. The £30m is deductible under FA94/S225 (3D) in the company’s tax return for the year ended 31 December 2013.
Where a corporate member enters into a multi-year contract before 6 December 2011, insurance is deemed to be taken out on the anniversary date of the contract falling on or after 17 July 2012 (FA2012/S25 (3)). Any premiums payable in respect of an underwriting year beginning on or after that date will, therefore, be dealt with on the declaration basis. Multi-year contract is defined as meaning a contract which (unless cancelled) operates in respect of successive underwriting years. The anniversary date of the contract means the date which is the anniversary of the date on which the contract was entered into (FA2012/S25 (4)).
Example: Company Y, a corporate member of Lloyd’s, took out stop-loss insurance on 1 January 2011 in relation to underwriting years 2011, 2012 and 2013. A premium of £10m is payable annually on 1 January under the insurance. The premium payable on 1 January 2013 will be dealt with on the declaration basis because it relates to an underwriting year beginning after 17 July 2012.
Where a corporate member enters into a contract for insurance in respect of an underwriting year before 6 December 2011 and that contract is renewed on or after 6 December 2011 for a further underwriting year, the insurance is regarded as taken out on the date of the renewal (FA2012/S25(5)). Any premiums payable under the contract will be dealt with on the declaration basis.