GIM6400 - Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: General Insurance Reserves (Tax) Regulations: disclaimers: example

A company has a provision in its accounts of £5000 at its accounting date on 31 December 2000.

It does not settle any of this liability but sets a new provision of £4000 in respect of the same liability on 31 December 2001.

The FA00/S107 calculation would normally have compared the discounted value of £4000 after one year (treated as the cost of settling the liability by virtue of Rule 3(d)), with the original reserve of £5000. At a discount rate of 2.79% the recalculated reserve would come to approximately £3891, and after deduction of the 5% margin a Revenue-favour adjustment based on the difference of £914 would arise for the period ended 31 December 2001.

If the company then settled the entire liability for £3000 in AP2002, the discounted value of this would come to approximately £2839, and a Revenue adjustment of £1105 would arise.

Total Revenue-favour adjustments of £2019 have been made, reflecting the difference between its original provision of £5000 and the discounted £3000 cost of settling its liabilities (i.e. £2839), less the 5% margin. This is shown in the table below.

If, however, the company had disclaimed say £3000 of the £5000 original provision, but not the later accounts figure of £4000, the result is a total taxpayer-favour adjustment of £697.

This reflects the difference between the original provision of £2000 and the discounted cost of settling liabilities of £2839, less the 5% margin. The actual adjustments made are a taxpayer-favour amount in AP 2001 and a Revenue-favour amount in AP 2002 to arrive at a net taxpayer adjustment of £697. This is shown below.

If the company had disclaimed £3000 of its reserve for AP 2000 in both 2000 and 2001, the calculations proceed as follows. Again there is a net taxpayer favour adjustment of £697.