GIM6400 - Technical provisions: periods of account beginning on or after 1 January 2000 and ending before 19 July 2007: General Insurance Reserves (Tax) Regulations: disclaimers: example

A company has a provision in its accounts of 拢5000 at its accounting date on 31 December 2000.

It does not settle any of this liability but sets a new provision of 拢4000 in respect of the same liability on 31 December 2001.

The FA00/S107 calculation would normally have compared the discounted value of 拢4000 after one year (treated as the cost of settling the liability by virtue of Rule 3(d)), with the original reserve of 拢5000. At a discount rate of 2.79% the recalculated reserve would come to approximately 拢3891, and after deduction of the 5% margin a Revenue-favour adjustment based on the difference of 拢914 would arise for the period ended 31 December 2001.

If the company then settled the entire liability for 拢3000 in AP2002, the discounted value of this would come to approximately 拢2839, and a Revenue adjustment of 拢1105 would arise.

Total Revenue-favour adjustments of 拢2019 have been made, reflecting the difference between its original provision of 拢5000 and the discounted 拢3000 cost of settling its liabilities (i.e. 拢2839), less the 5% margin. This is shown in the table below.

Year Reserve/ Paid Recalcul. Reserve Margin Cumul. Excess Excess this year
2000 5000 - - - -
2001 4000 3891 195 914 914
2002 3000 2839 142 2019 1105

If, however, the company had disclaimed say 拢3000 of the 拢5000 original provision, but not the later accounts figure of 拢4000, the result is a total taxpayer-favour adjustment of 拢697.

This reflects the difference between the original provision of 拢2000 and the discounted cost of settling liabilities of 拢2839, less the 5% margin. The actual adjustments made are a taxpayer-favour amount in AP 2001 and a Revenue-favour amount in AP 2002 to arrive at a net taxpayer adjustment of 拢697. This is shown below.

Year Reserve/ 听 听 听 听
Paid Recalcul. Reserve Margin Cumul. Excess Excess this year 听
2000 2000 - - - -
2001 4000 3891 195 (1696) (1696)
2002 3000 2839 142 (697) 999

If the company had disclaimed 拢3000 of its reserve for AP 2000 in both 2000 and 2001, the calculations proceed as follows. Again there is a net taxpayer favour adjustment of 拢697.

Year Reserve/ 听 听 听 听
Paid Recalcul. Reserve Margin Cumul. Excess Excess this year 听
2000 2000 - - - -
2001 1000 973 49 978 978
2002 3000 2839 142 (697) (1675)