BN 34: The tax treatment of general insurer's reserves

Who is likely to be affected?

1. General insurers, including general insurance companies, firms carrying on general insurance business which operate in the UK through a branch, controlled foreign companies that carry on general insurance business, and Lloyd’s members and syndicate managing agents.

General description of the measure

2. As announced in 2006 Pre-Budget Report, legislation will be introduced in Finance Bill 2007 to repeal the current rules dealing with the tax treatment of general insurers’ reserves. Repeal will be subject to a short transitional provision.
3. The measure will introduce, in place of the current legislation, a narrowly targeted rule to protect the Exchequer against tax loss. The Government will continue informal consultation with industry on the replacement rule, some elements of which will be provided by regulations made under the new measure.

Operative date

4. The existing rules will be repealed for, and the new rules will have effect for, periods of account ending on or after the date that Finance Bill 2007 receives Royal Assent.

Current law and proposed revisions

5. The current tax rules are in section 107 of Finance Act 2000 and Statutory Instrument No. 1757 of 2001. They were introduced to limit any tax advantage if general insurers set aside (“reserved”) more funds than were necessary to meet claims by policyholders.
6. The rules require general insurers to compare the amount that they originally reserved to pay claims made by policyholders with the later cost of settling those claims, and make a tax adjustment if there is a difference.
7. The rules contain an election (“the disclaimer election”), the intention of which was to enable general insurers to mitigate the effect of the tax adjustment that would otherwise arise. The disclaimer election has also been used to accelerate the use of tax losses in groups of companies, which causes a significant loss of tax.
8. Following an announcement at Budget 2006, the Government informally consulted industry on a review of the rules dealing with the tax treatment of general insurers’ reserves. The review concluded that the current rules are disproportionately complex for the tax risk that they seek to address.
9. The Government proposes therefore to repeal in Finance Bill 2007 all of the current tax rules dealing with the tax treatment of general insurers’ reserves, subject to a transitional provision which will allow a limited disclaimer election to be made for the first period of account ending after Royal Assent.
10. The tax treatment of general insurers’ reserves will then follow the commercial accounting treatment subject to a new measure that the Government proposes to introduce, which will be narrowly targeted, proportionate and better focussed on protecting the Exchequer against tax loss.
11. The new measure will limit the amount of a general insurer’s reserves that is allowed for tax purposes to an appropriate amount.
12. This limit will not interfere with a commercially driven estimate of future insurance liabilities and will therefore have no effect on the reserves of the great majority of general insurers. In the exceptional case, however, it will enable HM Revenue & Customs effectively to counter over-stated reserves.
13. To ensure these twin aims are met, the precise definition of the “appropriate amount”, which will be in regulations made under the new measure, will be the subject of further consultation with industry.

Further advice

14. If you have any questions about this change, please contact Simon Claydon 020 7147 2545 (email: simon.claydon@hmrc.gsi.gov.uk).