GIM6300 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: adjustments where there is a deficiency and a section 107(4) election has been made: example
Example
In the 2003 period of account, provisions of £1m were
wholly disclaimed by a FA00/S107 (4) election.
The resulting addition of £1m to Case I profits was
partly covered by group relief of £600,000.
For the 2004 period of account, the discounted cost of
settling liabilities (less a 5% margin of error) was £900,000.
There is a deficiency of £900,000 found by the initial
application of Rule 8.
The conditions for the operation of Rule 8A exist (see
GIM6290), and it requires a comparison of the original provisions
for the 2003 period of account of £600,000 (i.e. £1m
provisions in the accounts, less £1m disclaimed, plus
£600,000 group relief), with the cost of settling liabilities
of £900,000. The section 107(3) deficiency is therefore
£300,000, not £900,000 as would have been the case before
Rule 8A was introduced.
It is important to note that the amount added to the figure
of original provisions for the earlier period cannot exceed the
original provisions. So in this example if provisions of £1m
were disclaimed and the amount of group relief claimed had been
£1.5m, the amount added to the provisions for the purposes of
the FA00/S107 calculations would only be £1m. In this way any
actual deterioration of the technical provisions after the earlier
period is not affected by Rule 8A.
Rule 8A does not convert a deficiency into an excess. So to
continue this example, if provisions of £1m were disclaimed,
group relief of £600,000 was claimed, but the cost of settling
liabilities in 2004 was £400,000, the comparison would be
between original provisions of £600,000, and £400,000.
This would be an excess of £200,000 under FA00/S107 (2).
However, in this case the result of Rule 8A would be neither an
excess nor a deficiency.
The figure arrived at under Rule 8A is used only for the
purposes of calculating the interest charge under Rule 9. It does
not affect the amount of any adjustments for the “intervening
periods” to be made in carrying out any future calculations
for the same earlier period.
