GIM5100 - Taxation of the investment return: corporate and government debt: accounting periods ending after 31 March 1996: rules for insurance companies

An insurance company, like any other company, is required to use for tax purposes the accounting method which it uses in its Companies Act accounts. It should not use the method used in its FSA return.

In general, Schedule 9A Companies Act 1985 requires the use of a mark-to-market basis, subject to a company using the accruals basis for certain securities (see GIM2200). The method which is described at FA96/S85 as the authorised mark-to-market method is the so- called “dirty method” where any accruing interest on a security is included in the end of period valuation.

Schedule 9A, however, requires a “clean” mark-to-market where accrued interest is stripped out of the valuation and reported separately on the balance sheet.

FA96/S86 (6) ensures that a clean mark to market is treated as one which “equates” to an authorised mark to market which means that companies which use it for accounting must also use it for tax (unless it is prohibited by specific rules).

A company carrying on life assurance business was permitted to use an accruals basis for tax, even where it marked to market in its accounts, if it elected under FA96/SCH11/PARA5 (see the Life Assurance Manual at LAM 3B.39 onwards). Despite pressure from the industry this facility was not extended to general insurers and any attempt to apply accruals basis to assets marked to market should be resisted.

One of the special rules requiring use of the accruals basis even where mark to market is used in the accounts, is where the parties to the loan relationship are connected - FA96/S87 & CTM53805 onwards. This presumption is overridden, however, by FA96/S88 where a general insurer holds an asset that was acquired in the course of activities forming an integral part of its trade and the issuing company which issued the asset is connected with it (for example, its parent). This will be the case where any profit on disposal of the asset would have been treated as a trading receipt in accounting periods ending before 1 April 1996. There are other conditions to be met before mark to market can be used for such an asset - see CTM53880 and CFM5420 onwards.

Other special loan relationships rules do not apply where a disposal of the asset concerned would be a disposal in the course of activities which form an integral part of its trade, or the asset is held in the course of such activities. These are FA96/S92 and FA96/S92A (convertible securities); FA96/S93 (assets linked to the value of chargeable assets); and FA96/S96 (the two excluded gilts). Nor does the rule on index-linked gilts (FA96/S94) apply to trading credits.