GIM6390 - Technical provisions: periods of account beginning on or after 1 January 2000: General Insurance Reserves (Tax) Regulations: disclaimers

Regulation 8: section 107(4) elections

FA00/S107 (4) allows a general insurer to elect to reduce its tax deduction to less than the full amount of its accounts provision for unpaid liabilities. The election enables a company to reduce or eliminate additions to taxable profits that would otherwise arise as a result of section 107. If a company bases its tax deduction on a discounted best estimate of future liabilities, there will then be no later additions to profits if the figure is accurate to within 5%, or at least much smaller additions than if the tax deduction is based on undiscounted accounts reserves.

The taxpayer may elect to disclaim more than the amount needed to arrive at a discounted best estimate or indeed the whole provision, in which case later adjustments will almost certainly be in the taxpayer’s favour. The company cannot elect to increase, for tax purposes, the amount of the provision in the accounts, even if the accounts provision is discounted at a higher rate than is required by the regulations. However, if the election results in additions to profits which are then covered by group relief, losses brought forward or carried back, or loan relationships or intangible fixed assets losses, then any deficiency arising in a later period of account will be adjusted. This is so that Exchequer interest is not paid where no tax was paid on the additions to profits arising as a result of the election. See GIM6290 on Rule 8A.

Regulation 8 was amended by the 2003 regulations. Previously it was made as part of the company's CTSA return. Now, it must be in writing, and must specify the period of account for which the disclaimer is made. For example, an election disclaiming all or some of the accounts provision for the 2003 period of account must separately identify the provisions for the liabilities for 2000 to 2003 which provisions are being disclaimed, and the currency in which these provision are made.

The time limits for making an election correspond to the normal CTSA time limit. That is the first anniversary of the filing date, or 30 days after the completion of an enquiry, or an amendment to an enquiry or an appeal. This time limit is extended for insurers who use fund accounting to two years from the date of closure of the fund (see GIM4160 for how this is to be interpreted). The same result is achieved for a controlled foreign company that uses fund accounting, by amendment of the time limit in ICTA88/SCH24/PARA4 (2). An election may be made by a UK parent company of behalf of its CFC.

Disclaimers before the year end

Regulation 8 does not state the earliest date at which an election to disclaim part of a provision may be made for a period of account.

That date cannot however be before the provision has been calculated, which cannot be until the period of account has ended. In strictness, the provision cannot be said to be final until the director(s) have explicitly indicated their agreement to it by signing the accounts.

For practical purposes there is no objection to an election at an earlier time, as long as that is after the period of account to which it relates has ended. Elections made before the period of account to which they relate has ended should be resisted.