GIM10230 - Non-resident insurers: the scope of UK taxing rights: accounting periods beginning on or after 1 January 2003: section 11 ICTA & Article 7 OECD Model: changes in FA 2003: “free assets”

The Non-resident Insurance Companies Regulations 2003 (SI2003/2714) brought in a new concept in the notion of “free assets”. For the purposes of the regulations this means the amount by which the fair value (the amount obtainable on a sale to an independent person) of a PE’s assets exceed the aggregate of the technical provisions and loan capital of the PE. “Technical provisions” means an insurance company’s

• provisions for claims outstanding
• provisions for unearned premiums
• provisions for unexpired risks
• but not its equalisation provisions.

Each of these terms takes its meaning from Schedule 9A to the Companies Act 1985. See in particular Liabilities Items C 1 to 4 and 6, D and F in the balance sheet format set out in section B of that Schedule, notes 20 to 23 and 25 to 27 to that Format.

The effect of this is that if the PE’s actual free assets (which may be nil) are less than the free assets given by the section 11AA(2) hypothesis and the regulation 3 assumption, the company is to be treated as having additional profits in the shape of investment return from those excess assets. The excess assets attributed to the PE should be of a type and nature that an independent enterprise would hold, and should be assets that the company actually does hold even though not at, or directly attributable to, the PE.

The question arises how a company operating through a PE should satisfy itself, for the purposes of making its tax return, that its profits are such as to meet both the section 11AA(2) hypothesis and the requirements of regulation 3.

The Revenue’s view is that Methods 1 and 2 described in GIM10180 are still relevant. Thus Method 1 may give a result commensurate with regulation 3 and section 11AA(2) where the activities of the PE are similar in kind in all respects to the business of the entity as a whole. Method 2 on the other hand does seem to accord more closely to the section 11AA(2) hypothesis.

The Revenue will not seek to revisit agreements reached about the calculation of an arm’s length investment return purely because new legislation has been introduced. But it is likely that agreements based on Method 1 or which do not fully conform with Method 2 as set out in GIM10180 (because for example there is no possibility of investment return on assets above a minimum solvency margin being attributed) may feature in risk assessment processes.