GIM4140 - Taxation of general insurance: funded accounting

There is a conceptual difference between funded accounts and annual accounts in that in funded accounting all premiums and claims are related back to the underwriting year in which the relevant policy was written or “incepted” (see GIM2040). In accordance with the ABI SORP of November 2003, funded accounting should not be used for accounting periods beginning on or after 1 January 2004 except in Lloyd’s. The ABI SORP of December 2005 makes no mention of funded accounting and therefore requiring instead that the annual basis should always be used.

Funded accounting differs from annual accounts in that the balance of profit or loss for an underwriting year is not struck until some time (commonly two years) after the end of that year. It recognises the full value of any annual premiums relating to contracts “incepting” in an accounting period, together with the corresponding claims. There is no deferral of income (i.e. UPP) or expenses (i.e. deferred acquisition costs).

For pre-2004 accounting periods, although, the accounting for funded business follows UK GAAP for UK companies, it is not followed for tax purposes. The statutory override is sections ICTA88/S8 (3) and ICTA88/S70 (1). CT is charged for a financial year on profits “arising in that year”. Although there are some cases where a particular historical practice may govern the basis on which a company is taxed, the normal rule is that the company waits until the end of Year 3 to finalise its Year 1 profits. It is not a case of assessing the profits of Year 3 in Year 1.

This reflects the statement in the 1998 ABI SORP that “the recognition of profit is deferred until the underwriting year is closed”. The financial statements comprise the underwriting year result closed at the end of the accounting period. Profits therefore arise in the underwriting year, but are not ascertainable until later. Companies will therefore make a return for Year 1 at the end of the first year of the fund. This will normally reflect an underwriting profit of Nil, unless the result is expected to be a loss, in which case the loss will be recognised in the accounts.

When the fund is closed at the end of (say) Year 3, the final result will be substituted for the estimated figure presented in Year 1.