Introduction Background Note
12.The income and gains of a company’s life insurance business are taxed as they are brought into account in the company’s regulatory return to the Financial Services Authority (FSA). FSA rules allow companies to defer recognition of income and gains and this deferral is effective for tax purposes.
13.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. In a recent case, 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.
14.On 15 July 2009 Written Ministerial Statements were laid before Parliament announcing an intention, following industry consultation, to legislate to prevent the manipulation of the liabilities in a non-profit fund in order to avoid tax when previously unrecognised profits are recognised.
15.Following the Written Ministerial Statements, HM Revenue & Customs consulted widely with industry representative bodies and all those insurance companies that would be affected by a change of legislation. That consultation continued after draft clauses were published at the 2009 Pre-Budget Report and the legislation is the fruit of that consultation.