14.Where a life insurance company writes more than one type of insurance business, apportionment rules are used in determining the profits from each type of business. For non-profit funds this apportionment is on the basis of the liabilities to policyholders for each type of business in the fund.
15.The regulatory return, which is used as the starting point for determining life assurance business profits, allows companies to defer recognition of profits in a non-profit fund and this deferral is effective for tax purposes. When income and gains are recognised they are apportioned between categories of business on the basis of the mix of business liabilities at the time when the profits are recognised, not when they accrued. HM Revenue & Customs has seen a case where a company recognised a substantial amount of deferred income and gains, accrued in a period where the business was substantially life insurance business, in a period of account where there were no net life insurance business liabilities. This manipulation could have the effect of eliminating the tax due on these profits, particularly where non-profit funds were concerned.
16.In the light of this case, FA 2010 introduced section 432CA of ICTA. This legislation prevented companies achieving a tax benefit by requiring them, in appropriate cases, to apportion income and gains on the basis of an earlier year or years than that in which they are recognised.
17.It was recognised, however, that section 432CA could be circumvented if profits were effectively transferred to another company, where they would ultimately be recognised.
18.A Technical Note was issued on 24 March 2010 setting out the Government’s intention to close this loophole, and to consult on the form of the legislation required. That consultation has now taken place, and is taken into account in new section 432CB of ICTA.