GIM11140 - Captive insurers: controlled foreign companies: funded accounting: risk assessment

Identification of CFCs is part of the risk assessment process. Awareness of the special time limits which apply to CFCs which use funded accounting is particularly important. The enquiry window for the original return of the UK company will be the 12 months following the filing date. There is a further enquiry window of two years following the replacement of the technical provision. The UK company has 12 months from this date to amend its return, so the Revenue has at least 12 months to enquire into the amendment.

If the company’s intention changes or the ADP is not pursued, the company has 18 months and 30 days from the date of the replacement of the technical provision to amend its return. The enquiry window remains two years from this date, so the period in which the Revenue can enquire into the amendment may be as little as five months. Risk assessment procedures will need to ensure that the window does not close before any necessary enquiries are made.

In the case of the CFC with an accounting date of 31 December 2000 and a four year funded account for the 2000 underwriting year, the enquiry window will be two years from the date of replacement of the technical provision, i.e. 31 December 2005. If the company fails to pursue an ADP it has until 30 July 2005 to amend its return, i.e. 30 days after 18 months after 31 December 2003.

Discovery assessments should be made where necessary where it is discovered that a UK company’s return is found to be incorrect in respect of its CFCs. If the UK company has made a declaration that the CFC is exempt because it has pursued an ADP it should not be difficult to demonstrate whether or not an ADP has been pursued. Inspectors should check whether ADPs are paid as claimed.