GIM7350 - Equalisation reserves: the tax rules: anti-avoidance

ICTA88/S444BA (7) and ICTA88/S444BA (8) are anti-avoidance provisions which give the Revenue the right to rewrite the equalisation reserve where arrangements have been made or transactions have been entered into solely or mainly to obtain a tax benefit. A submission should be made in cases where it appears that an unintended tax advantage is being obtained.

Within groups, for example, opportunities may exist to maximise relief for equalisation reserves by arranging for more volatile business to be diverted away from a company that has reached its reserve ceiling. If that were to happen a transfer into the reserve of the divertee would be vulnerable to attack under ICTA88/S444BA (7) to the extent that it was triggered by premiums referable to the diverted business. Inspectors may, therefore, think it worthwhile investigating the reason for a reserve sticking at its maximum level, particularly if this is associated with an apparent change in the mix of business that the company writes, or the pattern of claims development.

It is worth noting that in the example in the preceding paragraph the tax advantage will not be apparent on the face of the equalisation reserve computation for the first company, so that it may be necessary to look at a group’s affairs as a whole in order to detect the existence of avoidance arrangements.