Revenue Note for Guidance

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Revenue Note for Guidance

81B Equalisation Reserves for credit insurance and reinsurance business of companies

Summary

This section allows certain insurance companies to take a tax deduction for transfers into a specific EU statutory equalisation reserve when calculating their profits or losses for tax purposes. The provisions apply from 15 July 2006.

Credit insurance companies are required by Article 14(8) of the European Communities (Non-Life Insurance) Regulations 1976 (S.I. No. 115 of 1976) to set up an equalisation reserve. Similarly, Regulation 24 of the European Communities (Reinsurance) Regulations 2006, requires a reinsurance undertaking writing certain credit insurance to create, and maintain, an equalisation reserve.

Credit insurance broadly provides insurance against business to business payment default and the particular type of credit insurance risks covered under these Regulations are export credit, installment credit, mortgages and agricultural credit.

The section provides for a tax deduction for the transfer of any amounts into this equalisation reserve. It also provides that transfers out of this reserve will be treated as income for tax purposes thereby recouping the tax relief provided as the reserves are reduced. The section also contains a provision to claw back the tax relief in full where a company ceases to trade.

Details

Definitions

(1) “credit insurance risks” is defined to mean risks included in class 14 of Section A of the Annex to the First Council Directive 73/239/EEC of 24 July 1973. Effectively, credit insurance is insurance against business-to-business payment default and the particular type of credit insurance risks covered are export credit, instalment credit, mortgages and agricultural credit.

“Principal Regulations” is defined to mean the European Communities (Non-Life Insurance) Regulations 1976 (S.I. No. 115 of 1976) as amended from time to time.

“Reinsurance Regulations” means the EC (Reinsurance) Regulations 2006 (S.I. No. 380 of 2006).

“relevant rules” are certain calculation rules set out in point D (as inserted by Council Directive 87/343/EEC of 22 June 1987) to the Annex to the First Council Directive 73/239/EEC of 24 July 1973.

Application

(1A)(a) Paragraph (a) provides that the section applies to an insurance company whose business has at any time been, or included, business in respect of which it was required, to establish and maintain an equalisation reserve by virtue of Regulation 24 of the “Reinsurance Regulations”. This applies to reinsurance companies writing credit insurance.

(1A)(b) Paragraph (b) provides that the section also applies to credit insurance companies that underwrite “credit insurance risks” and which are required by Article 14(8) of the “Principal Regulations” to set up an equalisation reserve.

(2) Amounts calculated under the “relevant rules” referred to in subsection (3), can be taken into account by an insurance company, in the Schedule D Case I computation of profits or losses of an accounting period, where that company is required under Regulation 24 of the “Reinsurance Regulations” or, under Article 14(8) of the “Principal Regulations” to create and maintain an equalisation reserve.

(3) The rules to be applied for the purposes of subsection (2) above are:

  1. (a) amounts, calculated under the “relevant rules”, transferred into the equalisation reserve in a period are to be tax deductible in that period,
  2. (b) amounts, calculated under the “relevant rules”, transferred out of the equalisation reserve in a period are to be treated as receipts in that period, and
  3. (c) it is to be assumed that these transfers which are required under the Reinsurance Regulations or the Principal Regulations to be made for any period are actually carried out in that period.

(4) Where the company ceases to trade, the balance on the reserve immediately before cessation will be deemed to have been transferred out at that time and, accordingly, that amount will be treated as a trading receipt in that accounting period.

(5) Subsection (2) will not apply to any transfer into the equalisation reserve which relates to arrangements entered into wholly or mainly for tax purposes. Accordingly, the amount will not be taken into account in profits or losses under Case I of Schedule D.

(6) Arrangements are entered into wholly or mainly for tax purposes when the sole or main purpose is, or benefit might (apart from subsection (7) below) be, expected to be the reduction of any tax liability.

(7) Where transfers are made in and out of the equalisation reserve over a period (“equalisation period”) that is different from the accounting period for tax purposes, an apportionment of the amount transferred can be made based on the number of days in the equalisation period that are included in each of the accounting periods.

Relevant Date: Finance Act 2019