GIM7220 - Equalisation reserves: the tax rules: funded accounting

A company may report its results to the regulator using a non-annual (or funded) basis of accounting, but may use a different basis in preparing tax computations. GIM4140 explains the general tax treatment of non-annual accounting, but special consideration is needed for equalisation reserves.

Where non-annual accounting is followed for tax purposes, the taxable profit for a particular underwriting year is not determined until that year “closes”. The equalisation reserve transfers shown in the regulatory return (or calculated in accordance with the Equalisation Reserves Rules) for a particular financial year are treated as additions to or deductions from the Case I profit for the tax accounting period which corresponds to that financial year.

For example, for the financial year 2001, there may be a net transfer out of the reserve of £500,000. This amount will be added to the Case I profit for the accounting period ended 31 December 2001 even though that cannot be computed until the 2001 underwriting year closes at the end of, say, 2003. Where tax computations based on non-annual accounts are adjusted in the way described at GIM4140 by the inclusion of estimated figures so as to enable the tax computations to be finalised once the return figures for a particular year are available, the equalisation reserve transfers shown in the return for a financial year fit naturally into the tax computation for the same accounting period. No adjustment or apportionment is needed unless the two periods are not coterminous. In that case the equalisation reserve transfers will be apportioned in exactly the same way as described in GIM7210.