Explanatory note

Sections 55 to 149 of, and Schedules 17 to 19 to, the Finance Act 2012 (c. 14) (“FA 2012”) establish a new regime for the taxation of insurance companies. As from 1 January 2013 the starting point for the calculation of the trading profits of insurance companies will be the statutory accounts. Schedule 17 to FA 2012 contains provisions which govern the transition from the old basis of taxation (based on the regulatory returns made to the Financial Services Authority) to the new basis. The Schedule permits HM Treasury to make further provision for the transition by way of regulations. These Regulations contain further transitional provisions.

Regulation 1 deals with citation, commencement and interpretation.

Regulation 2 gives an overview of the Regulations.

Paragraph 6 of Schedule 17 to FA 2012 explains that the difference between the amount attributed to the shareholders as at 31 December 2012 and the cumulative taxed surplus (“the total transitional difference”) is comprised of a number of particular items found by comparing amounts in the 2012 periodical return with amounts in the 2012 balance sheet and allocating a positive or negative amount to each item. Paragraph 6(3) gives HM Treasury the power to prescribe the way in which the comparison of the items must be done and to prescribe the method for making the allocation of the positive or negative amount to each item. Regulation 3 prescribes how the items that taken together result in the total transitional difference by requiring a comparison to be made between the amounts in column 1 and the amounts in column 2 of the Table in regulation 4. The regulation also prescribes how the negative or positive amount is to be allocated to each item. Regulation 5 makes provision for adjustments to amounts in the Table in certain cases. Regulation 6 defines terms used in the Table and regulation 5.

Paragraph 7 of Schedule 17 to FA 2012 states that each of the items that together constitute the total transitional difference is a relevant computation item for the purposes of Schedule 17 to FA 2012 unless it is an “excluded item”. These items are defined in paragraph 7(2)(a) to (d). In sub-paragraph (2)(e) HM Treasury is given the power to provide by way of regulations that other items are to be “excluded items” for the purposes of Schedule 17. Regulation 7 makes provision for certain items to be “excluded items” for the purposes of paragraph 7 of Schedule 17 to FA 2012. The consequence of these items being “excluded items” is that they are not relevant computational items for the purposes of Part 2 of Schedule 17 to FA 2012.

Paragraph 8 of Schedule 17 to FA 2012 requires each relevant computational item to be apportioned between the categories of businesses specified in that paragraph which were carried on by the insurance company as at 31 December 2012. In paragraph 8(2) HM Treasury is given power to make regulations apportioning the relevant computational items between the specified businesses. Regulations 8 to 10 makes provision for apportioning the relevant computational items between the categories where the item relates to a with-profit fund.

Regulations 11, 13 and 14 makes similar provision where the relevant computational item relates to a non-profit fund.

Regulation 12 makes provision in relation to items treated as relevant computational items.

Regulation 15 makes provision where relevant computational items are apportioned to basic life assurance and general annuity business where section 67 of the Finance Act 2012 (exception where BLAGAB small part of long-term business) applies.

Regulation 16 amends paragraph 20 of Schedule 17 to the Finance Act 2012 (overseas life insurance companies) to extend the exclusion from Schedule 17 provided by that paragraph to cases where accounts are prepared under Council Directive of 19th December 1991 on the annual accounts and consolidated accounts of insurance undertakings (No 91/674/EEC).

A Tax Information and Impact Note covering this instrument was published on 6 December 2011 alongside draft clauses for the 2012 Finance Bill and is available on the HMRC website at http://www.hmrc.gov.uk/thelibrary/tiins.htm. It remains an accurate summary of the impacts that apply to this instrument.