Statement of Intent

Corporation Tax treatment of reductions in a Life Insurer’s liabilities to policyholders

Background

The Financial Services Authority has made an instrument, the Prudential Requirements for Insurers (Amendment) Instrument 2006 (FSA 2006/62) which gives effect to the proposals set out in its Consultation Paper 06/16 and its Policy Statement 06/14.

The instrument has effect for periods ending on or after 31st December 2006 and allows insurance companies to change their method of calculating their liabilities to policy holders in their return made to the FSA for that period.

Where this change results in a reduction in liabilities the effect of the reduction may be a commensurate increase in the company’s profits for tax purposes, where those profits are calculated in accordance with the provisions of Case I of Schedule D.

In response to paragraphs about tax in CP 06/16 the industry has requested an amelioration of the tax that would arise if increased profits were recognised for tax purposes fully in 2006. The same issue also arises in respect of the changes introduced following FSA consultation paper 06/12 (Reinsurers).

Accordingly the Treasury has made and laid an Order, the Insurance Companies (Corporation Tax Acts) (Amendment No. 2) Order 2006
(SI 2006/3387) which defers the impact of corporation tax on the profit arising from the revaluation of liabilities (called the “relevant amount” in the Order) from the first period to end after 30th December 2006 to the next period.

The deferral is only available where an insurer identifies the amount of the release in paragraph 4(12) of the Appendix 9.4 report in its periodical return. It is available only in respect of changes to the liabilities of a company’s non-profit funds to the extent that the relevant amount has not been reflected in the Form 14 Line 51 amount (if any) in that return.

The Order is a temporary measure designed to allow companies to reflect the deferral in the tax provisions in their accounts. HM Revenue and Customs has been discussing other aspects of the profits release with the industry and the Government is now in a position to set out what further measures will be introduced in 2007.

Spreading

In accordance with the Order, the relevant amount identified as above to be spread (‘the relevant amount’) will be added to closing liabilities for the period of account which includes 31 December 2006, and will be added to the opening liabilities for the period of account immediately following the first period of account to end on or after 31 December 2006.

The relevant amount will then be spread on the following pattern, assuming calendar year accounting

Release at 31/12/2006

Nothing taken into account for CT purpose in 2006
1/3 taken into account in 2007
1/3 taken into account in 2008
1/3 taken into account in 2009

Release at 31/12/2007

1/3 taken into account in 2007
1/3 taken into account in 2008
1/3 taken into account in 2009

Release at 31/12/2008

2/3 taken into account in 2008
1/3 taken into account in 2009

Release at 31/12/ 2009 et seq.

Fully taken into account - no spreading

For non-calendar year periods of account, spreading will be for the period of account which contains 31 December 2006 and for subsequent periods of account covering three years from the beginning of the first period to commence after the end of the period of account which contains 31 December 2006. Where any of these periods of account extends for less than or more than a year, amounts to be spread will be reduced or increased in proportion.

Transfers of Business

Where there is a transfer of business, the untaxed portion of the relevant amount will carry across from transferor to transferee and will be added to the untaxed proportion of the transferee’s relevant amount (if any), with spreading continuing on the basis set out above Where a part transfer of business is made, a just and reasonable apportionment will be made.

Apportionment of income and gains and of net section 83 amounts

If the presence of ‘negative liabilities’ allowed by CP 06/16 would otherwise lead to negative liabilities in respect of any category of business, then the liabilities of that category of business will be deemed to be zero, for the purposes of sections 432A(5), 432C(4), 432D(3) and 432E(3)of, and Schedule 19AA to, the Income and Corporation Taxes Act 1988 (the “apportionment provisions”). Note that some of these provisions are expected to be amended, and some repealed, by the Finance Bill (“FB”) 2007. Appropriate amendments will be made in FB 2007 or a further Order to reflect the effect of the spreading on the amended provisions.

If the existence of zero liabilities for any categories of business would result in the denominator of any fractions computed under the apportionment provisions being zero, then a just and reasonable apportionment will be made.

If a company identifies any anomalous apportionment situations arising from the CP06/16 (or CP06/12) changes not covered by the above, please inform Colin McHardy at HMRC (020 7147 2614, e-mail colin.mchardy@hmrc.gsi.gov.uk)

Further work

This statement of intent covers the principles which HMRC will apply in dealing with tax issues arising from FSA instrument 2006/62. These principles have been developed in collaboration with a working group comprising HMRC staff, insurance industry representatives and their professional advisers. The further work needed to translate these principles into an Order will be undertaken by the working group with a view to HMRC making recommendations to the Economic Secretary to the Treasury for the laying of a further Order to give effect to these principles early in 2007.