As explained in
LLM4220, under FA02/SCH29 the tax
treatment of syndicate capacity generally follows the accounting
treatment, that is, corporate members receive tax relief on the
amortisation charged in the accounts. Under FA02/SCH29/PARA10, a
corporate member can elect for a 4% writing down allowance based on
the cost of the capacity asset, instead of the amortisation charge.
The election must be made within 2 years of the end of the
accounting period in which the asset is created or acquired. A
corporate member with a 31 December accounting date would therefore
have to make such an election by 31 December 2004 for an asset
first acquired during 2002. No election may be made in respect of
capacity first acquired more than two years before the start of the
intangible assets regime.
An election made in respect of capacity in a particular
syndicate is effective for any future additions to the capacity in
the same syndicate. If no election is made within 2 years of the
end of the accounting period in which the capacity is first
acquired, it will not be possible to make any future elections in
respect of any later additions to it.
The HMRC view as reflected in a Lloyd’s Market Bulletin
Y3530 issued on 29 March 2005 was that capacity on a syndicate
falls within the definition of ’fungible assets’ in
FA02/SCH29/PARA107. FA02/SCH29/PARA126 treats capacity on a
particular syndicate that was acquired before 1 April 2002 as a
separate asset from capacity on the same syndicate that is acquired
on or after that date. Any disposals, or part disposals, diminish
the pre-1 April 2002 asset in priority to the later asset.
On this analysis, as ’pre-April 2002’ and
’post-March 2002’ holdings of capacity on a syndicate
are separate assets, the FA02/SCH29/PARA10 time limit for making
elections applies separately in respect of each of them. That is,
two years from the end of the accounting period in which the
company first acquired the asset. This will therefore be the date
of first acquisition of the capacity or the date of the first
addition that was made on or after 1 April 2002, as the case may
be.
The view that syndicate capacity is fungible does not,
however, sit entirely happily with the treatment of the capacity as
an ‘enhancement asset’ in the hands of Names –
see
LLM8040. As noted at
LLM8110, establishing the true nature of
legal capacity has given rise to considerable difficulties.
Subsequent legal advice suggests that syndicate capacity is a
peculiar if not unique type of asset given the special
characteristics of the Lloyd’s arrangements. The better view
is probably that capacity is not fungible given the nature of the
‘annual venture’ described at
LLM1080: one cannot in strictness say
that the capacity held in, say, 2006 is the same as the capacity
held for the ‘same’ syndicate in 2007, as strictly it
is not the same syndicate. However, in the light of uncertainty and
of syndicate capacity’s unique nature HMRC will not seek to
review the treatment flowing from Market Bulletin Y3530.
