GIM7250 - Equalisation reserves: the tax rules: election not to take a tax deduction
An insurer may on election waive all or part of a tax deduction for a transfer into an equalisation reserve. Such an election is most likely to be made where the effect of a tax-effective transfer would be to reduce the amount of UK corporation tax against which relief can be given for foreign taxes on branch profits. If such an election or waiver is made, subsequent transfers out of the reserve will not be brought into account to that extent.
ICTA88/S444BA (4) is the relevant legislation. It refers to 'an amount' that is transferred into the reserve and an election in relation to 'that amount'. This includes a partial waiver. A company may also waive a deduction for the whole of a transfer into its credit business reserve even if there is a transfer out of its general reserve (or vice versa). However, a company may not look through the net transfer into or out of a reserve in order to make an election in relation to an amount greater than the net transfer in. The election must be made by notice in writing to an officer of HMRC not more than two years after the end of the period to which the election relates. It also provides that the unrelieved transfer be carried forward to subsequent accounting periods so that a set off may be made against future transfers out of the reserve.
ICTA88/S444BA (5) and ICTA88/S444BA (6) provide that an unrelieved transfer into the reserve which is carried forward must be set against any future transfers out at the earliest possible opportunity. In other words, transfers out of the reserve are not added to the taxable profit until they exceed any unrelieved transfers in not previously matched with transfers out.
It follows that where an election is made to waive tax relief a record will be needed of the amount of relief waived until all of the unrelieved transfers into the reserve have been set against subsequent transfers out of the reserve. Errors are possible in relation to this process, which may therefore feature in the risk assessment.