GIM5190 - Taxation of the investment return: investment gains: periods of account beginning on or after 1 January 2002: transition from realisations basis: change of accounting basis

Before the enactment of FA 2002, FA98/S44 and FA98/SCH6 had governed the computation of profits where a business had a change of accounting basis.

The new rules extended these provisions to cover the situation where a business, without changing its accounting basis, changed the way in which it accounted for something for tax. The commonest such change affecting insurance companies is the change from realisation basis to mark to market for portfolio investments.

FA02/S64 and FA02/SCH22 provide a comprehensive set of rules where there is a change of accounting basis, or a change in the way a business accounts for something for tax. These ensure that profits and losses are neither counted more than once nor left out of account to any extent. In particular FA02/SCH22/PARA8 applies to insurance companies in the situation where they change from realisation basis to mark-to-market for portfolio investments. Any difference between the fair value at the start of the first new basis period following the change, and the cost of the asset, is not recognised in full in the first period of change, as would be required by the general rule in paragraph 2 of that Schedule. Instead it is brought into account only when the asset is disposed of.

As an alternative to this, FA02/SCH22/PARA9 provides that the company may make an election to bring the difference arising on all the assets affected by the change into account in six equal amounts, in the first period of change and the five subsequent periods.