GIM6150 - Technical provisions: periods of account beginning on or after 1 January 2000: section 107 FA2000: introduction

Background

Finance Bill 2000 included proposals to impose a tax adjustment to the technical provisions of general insurers that exceed the discounted cost of settling the liabilities in respect of which the provisions were set. These proposals were enacted as FA00/S107 and the legislation applies to the provisions set in ‘periods of account’ beginning on or after 1 January 2000. ‘Period of account’ means a period for which a general insurer draws up accounts (see GIM6160 for more details of definitions used in the legislation).

Following consultation, detailed Regulations (SI2001/1757) to supplement the legislation came into force on 29 May 2001. In 2003 the Regulations were amended (SI2003/2862) for periods of account ending on or after 5 December 2003.

The broad intention of the legislation is to compensate the Exchequer for both over-reserving by general insurers and for the failure to discount provisions. Conversely, where the cost of settling liabilities is more than the technical provisions which were made for those liabilities, an amount is deducted in the insurer’s computations.

Commencement

FA00/S107(12) deals with the commencement of the rules. The first period of account to which the rules apply, and for which an election under FA00/S107 (4) can be made, is the one beginning on or after 1 January 2000.

The first later period of account, in which a recalculation of technical provisions of an earlier period of account is carried out, is the one beginning on or after 1 January 2001.

Regulations

FA00/S107 (5) and FA00/S107 (6) contain regulation-making powers. The regulations (the General Insurance Companies Reserves (Tax) Regulations) are in SI2001/1757 as amended by SI2003/2862 and SI2005/3289. They provide the method of calculating whether the technical provisions were excessive or insufficient and set out other details of the operation of the legislation. See GIM6190 for more on the Regulations.

Lloyd’s

FA00/S107 (8) to FA00/S107 (11) contain special rules adapting the application of the legislation to Lloyd’s underwriters. FA00/S107 (7) defines ‘period of account’ in relation to Lloyd’s as an underwriting year in which profits are declared. The application of the rules to Lloyd’s is dealt with in Chapter 3 of the Lloyd’s Manual.

Repeal of section 107 FA 2000

Legislation will be introduced in Finance Bill 2007 to repeal FA00/S107 with effect from the date that the Finance Bill receives Royal Assent (which typically will be by the end of July). If legislation is passed it will therefore mean that FA00/S107 will not have effect for accounting periods ending on or after the date that the Finance Bill receives Royal Assent.

Repeal is however subject to a short transitional provision to allow an election under FA00/S107 (4) – see GIM6180 – in the first period to end after the date that the Finance Bill receives Royal Assent. The election is limited to 10% of the technical provisions for that period – see GIM6160.