Corporate members: syndicate capacity: accounting periods ending on or after 1 April 2002: paragraph 10 elections
As explained in LLM4220, under FA02/SCH29 the tax treatment of syndicate capacity generally follows the accounting treatment, that is, corporate members receive tax relief on the amortisation charged in the accounts. Under FA02/SCH29/PARA10, a corporate member can elect for a 4% writing down allowance based on the cost of the capacity asset, instead of the amortisation charge.
The election must be made within 2 years of the end of the accounting period in which the asset is created or acquired. A corporate member with a 31 December accounting date would therefore have to make such an election by 31 December 2004 for an asset first acquired during 2002. No election may be made in respect of capacity first acquired more than two years before the start of the intangible assets regime.
An election made in respect of capacity in a particular syndicate is effective for any future additions to the capacity in the same syndicate. If no election is made within 2 years of the end of the accounting period in which the capacity is first acquired, it will not be possible to make any future elections in respect of any later additions to it.
A ‘fungible’ asset?
The HMRC view as reflected in a Lloyd’s Market Bulletin Y3530 issued on 29 March 2005 was that capacity on a syndicate falls within the definition of ’fungible assets’ in FA02/SCH29/PARA107. FA02/SCH29/PARA126 treats capacity on a particular syndicate that was acquired before 1 April 2002 as a separate asset from capacity on the same syndicate that is acquired on or after that date. Any disposals, or part disposals, diminish the pre-1 April 2002 asset in priority to the later asset.
On this analysis, as ’pre-April 2002’ and ’post-March 2002’ holdings of capacity on a syndicate are separate assets, the FA02/SCH29/PARA10 time limit for making elections applies separately in respect of each of them. That is, two years from the end of the accounting period in which the company first acquired the asset. This will therefore be the date of first acquisition of the capacity or the date of the first addition that was made on or after 1 April 2002, as the case may be.
The view that syndicate capacity is fungible does not, however, sit entirely happily with the treatment of the capacity as an ‘enhancement asset’ in the hands of Names - see LLM8040. As noted at LLM8110, establishing the true nature of legal capacity has given rise to considerable difficulties. Subsequent legal advice suggests that syndicate capacity is a peculiar if not unique type of asset given the special characteristics of the Lloyd’s arrangements. The better view is probably that capacity is not fungible given the nature of the ‘annual venture’ described at LLM1080: one cannot in strictness say that the capacity held in, say, 2006 is the same as the capacity held for the ‘same’ syndicate in 2007, as strictly it is not the same syndicate. However, in the light of uncertainty and of syndicate capacity’s unique nature HMRC will not seek to review the treatment flowing from Market Bulletin Y3530.