Explanatory Notes

Finance Act 2012

2012 CHAPTER 14

17 July 2012

Introduction

Section 25: Corporate Members of Lloyd’s: Stop-Loss Insurance and Quota Share Contracts

Summary

1.Section 25 introduces new rules for the taxation of premiums payable by corporate members of Lloyd’s under stop-loss insurance. It also includes an anti-avoidance provision in respect of quota share contracts.

Details of the Section

2.Subsection (1) inserts new subsections (3C) to (3G) into section 225 of Finance Act 1994 (FA).

3.New section 225(3C) provides that the tax treatment described in new section 225(3D) shall apply to any premium payable by a corporate member of Lloyd’s in respect of that member’s underwriting business which is not already taxed under the rules in section 220(2)(a) of FA 1994.

4.New section 225(3D) sets out the tax treatment for a premium which meets the description in new section 225(3C).  The premium will be treated as if it were an amount that had arisen directly as a consequence of that member’s membership of the syndicate or syndicates in respect of which the stop-loss insurance was taken out.  In addition, it will be treated as if it were payable in the underwriting year in which the profits or losses of those activities are declared.

5.New section 225(3E) provides for the situation where a stop-loss insurance premium is payable in respect of two or more underwriting years.  The premium payable in respect of each of those years for the purposes of new section 225(3D) must be determined on a just and reasonable basis.

6.New section 225(3F) sets out the tax treatment where a corporate member of Lloyd’s enters into a quota share contract and the main purpose, or one of the main purposes, for entering into that contract was to avoid the tax treatment set out in new section 225(3G).  In such a case, the contract will be treated as if it were a stop-loss insurance and any amounts payable under the contract will be treated as premiums. The deemed premiums will be taxed in accordance with new section 225(3D).

7.New section 225(3G) describes the tax treatment referred to in new section 225(3F), the attempted avoidance of which triggers the operation of new section 225(3F). The relevant tax treatment is that amounts are treated as payable in the underwriting year in which the profits or losses arising to a corporate member directly from its membership of one or more syndicates are declared.

8.Subsection (2) provides that the amendment made by this section applies to stop-loss insurance (as defined by section 230(1) of FA 1994) and quota share contracts (as defined by section 225(4) of FA 1994) taken out or entered into on or after 6 December 2011.

9.Subsection (3) provides for the situation where a corporate member enters into a multi-year contract before 6 December 2011.  Insurance is deemed to be taken out on the anniversary date of the contract falling on or after the date this Act is passed.   Premiums payable under the contract for an underwriting year beginning on or after the day this Act is passed are premiums to be dealt with in accordance with the amendments made to section 225 of FA 1994 by this section.

10.Subsection (4) defines the terms “multi-year contract” and “the anniversary date of the contract”.

11.Subsection (5) provides for the situation where a corporate member enters into a contract for insurance in respect of an underwriting year before 6 December 2011 and that contract is renewed on or after 6 December 2011 for a further underwriting year.   Insurance is regarded as taken out on the date of renewal.

Background Note

12.Following the Budget 2011 announcement, the Government has been consulting with Lloyd’s and interested parties on proposals to amend the timing of the tax deduction for Lloyd’s member-level stop-loss premiums.

13.Taking into account these discussions, the Government has decided to amend the timing of the tax deduction for all premiums payable by corporate members of Lloyd’s in respect of member-level stop-loss insurance taken out on or after 6 December 2011. The legislation will align the timing of the tax deduction for the premiums with the recognition of the profits to which they relate.

14.Following consultation on the draft legislation published on 6 December, the Government decided to make further provisions to deal with multi-year contracts and renewals of contracts taken out before 6 December 2011.