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Utilisation of provisions |
See Also
Technical provisions | Utilisation of provisions - summary
Select from the following headings:
Background | Developing the schedule | Completing the Schedule | Standard Sub-Schedules | Carry Forward | Related Errors
This schedule calculates the excess or deficiency in technical provisions for liabilities on general insurance policies written. The excess or deficiency is calculated by the application of discounting under the rules in FA 2000 s 107 and the General Insurance Reserves (Tax) Regulations SI 2001/1757
This schedule is only available in the General Insurance module. It is not currently available for long periods of account. The schedule may be obtained by using the Develop option from the Utilisation of provisions summary schedule.
In years from 2005 onwards, the schedule is available in multi-trade computations.
Typically, one schedule will be developed for each earlier period in which a provision was made. However, schedules could alternatively be set up to analyse provisions within an earlier period.
Earlier periods commencing before 1 Jan 2000 are not within the rules in FA 2000 s 107, and thus a schedule should not be developed for such periods.
At the top of the schedule, there is a data entry area for the basic data - a description of the provisions dealt with on the schedule (either all of the provisions for the earlier period, or a category of them), the closing date of the earlier period, the amount of the original provision and the discount rate applicable to the earlier period.
In years from 2003 onwards, a separate data entry cell is provided for the amount of the original provision after any disclaimer election under FA 2000 s 107(4). It is essential that this cell is completed ? if the entire provision was disclaimed, please enter zero.
In the area below this, one data entry column is used for each later period, starting on the left of the available columns. In outline, Regulations require a comparison for each later period - the original provision is compared with the claims etc actually paid up to the end of the later period, and the remaining provision at the end of that period. Discounting is applied in doing this comparison. The resultant cumulative excess or deficiency in provision up to the end of the later period is then adjusted by a margin for error, and compared with the cumulative position at the end of the previous "later period", to give the incremental excess or deficiency for the current "later period". Interest is then applied to the excess or deficiency for the current period and this figure, after adjusting by a deduction for deemed tax, is the amount to be included in the tax computation as a trade receipt or expense.
In order to effect the above calculations, the user simply needs to enter, for the current "later period", the amount of the claims paid, bonuses / rebates, reinsurance premiums and other payments during the period, together with the remaining provision at the end of the later period. The calculation of the excess or deficiency and the resultant interest will then take place automatically, subject to some user options (see below).
In years from 2003 onwards, a separate data entry cell is provided for the amount of the remaining provision after any disclaimer election under FA 2000 s 107(4). It is essential that this cell is completed ? if the entire provision was disclaimed, please enter zero.
Discounting is applied from the end of the later period in the case of the remaining provision, and from the mid point of the later period in the case of claims, bonuses / rebates, reinsurance premiums and other payments (in accordance with HMRC permitted practice). The user may specify a date different from the mid point of the period, where required, as the date from which discounting is applied - different dates may be entered for each category of payment. If no date is entered for a category, then the mid period point will be used for that category. The required dates may be entered towards the bottom of the schedule, below the main calculation area.
Adjustments due to Rule 8A
In years from 2003 onwards, the schedule includes additional functionality to deal with the anti-avoidance provisions in Rule 8A in Regulation 3 of the Regulations.
The user needs to determine in each case whether Rule 8A applies. The schedule will show whether a deficiency is calculated for the later period concerned, and the user will have completed the schedule to show whether a disclaimer was made under FA 2000 s 107(4). If there was a relevant loss offset in the period in which the disclaimer was made, the user should enter this amount in the section provided towards the bottom of the schedule ? ?Analysis of adjustments in respect of loss set-off?. The Rule 8A adjustment will then be calculated automatically by the system.
Where there are multiple disclaimers in a period, the Adjustment of original provisions schedule can be used to allocate the loss offset to earlier period provisions ? to avoid one loss offset being counted more than once for several earlier period provisions. Loss offset amounts allocated to a particular earlier period can be manually linked from the Adjustment of original provisions schedule to the Utilisation of provisions schedule.
It should be noted that a given loss offset amount will often need to be entered at the bottom of the Utilisation of provisions schedule in the columns for several later periods. In particular, if the loss offset and disclaimer were in the earlier period, the calculations for many later periods are likely to be affected.
Options regarding Rule 8A
In years from 2004 onwards, a user choice is provided at the bottom of the schedule, in relation to the method of dealing with a partial disclaimer of a provision in the earlier period. Under the original wording of Rule 8A, the adjustment under that Rule is limited by reference to the full amount of the original provision for the earlier period, rather than the amount disclaimed. This can lead to a possibly unfair result in the case of a partial disclaimer.
The default behaviour of the schedule is to apply the restriction by reference to the full amount of the provision for the earlier period. By changing the setting of the selector ?Apply restriction to Rule 8A by reference to amount of provision disclaimed??, the user can amend this functionality to have regard to the amount disclaimed in calculating the amount of the restriction.
A further user choice regarding Rule 8A is provided in years from 2005 onwards. This concerns the method of calculating the excess or deficiency for an individual later period. The default functionality of the schedule is to calculate the excess or deficiency for a later period by comparing the cumulative excess or deficiency for the current later period with the cumulative figure for the previous later period.
If Rule 8A applied in the previous later period, the comparison is with the cumulative figure for the previous later period, reflecting the Rule 8A adjustment. If Rule 8A did not apply in the previous later period, then the comparison is with the cumulative figure for the previous later period, without any Rule 8A adjustment.
This default behavioiur is subject to the point that, where Rule 8A has applied in some later periods but not in others, it may be arguable as to how the results of the recalculation in any intervening periods, as required by Rule 8.1(b), should be calculated. For this reason, a selector is provided for each later period towards the bottom of the schedule, on the row for ?Alternative Rule 8A calculation?.
Setting this selector to ?Yes? for any later period means that the excess or deficiency for that period will be calculated as the cumulative excess or deficiency for the current later period less the sum of the individual excess or deficiency figures for previous later periods. The latter figures will reflect a Rule 8A adjustment if Rule 8A applied in the previous later period concerned ? otherwise, they will not.
It is possible for users to substitute their own calculated figure for the system calculation of the sum of the individual excess or deficiency figures for previous later periods ? where required, the ?Override? row (beneath the ?Alternative Rule 8A calculation? row towards the bottom of the schedule) should be used for this purpose.
Particularly where Rule 8A applies in some later periods and not in others, users are advised to review the use of the ?Alternative Rule 8A calculation? as described above. If the alternative calculation is used for a later period, users should review carefully to determine whether the alternative calculation should also be used in other later periods.
Users need to decide for themselves as to the appropriate setting of the above selectors. It should be noted that the default setting of the selectors is not intended to indicate a recommended method ? the appropriate method depends on the facts of each case and users? interpretation of the relevant Regulations etc, and could also be affected by changes in HMRC practice or by possible changes in the applicable Regulations.
Method of calculating interest
In years from 2003 onwards, the schedule includes a user choice as to the method of calculating interest on an excess or deficiency.
In 2003 periods, this choice is between a ?Specific interest calculation? and ?Average interest rate for calendar year periods?.
The ?Specific interest calculation? uses the interest rates published by HMRC under Regulation 3ZA of the Taxes (Interest Rate) Regulations SI 1989/1297, as referred to in Rule 9 in Regulation 3 of the General Insurance Reserves (Tax) Regulations SI 2001/1757. These rates are used for the periods for which they are applicable, within the overall period for which interest needs to be calculated.
The choice for ?Average interest rate for calendar year periods? uses the calculated rates for calendar year periods as published by HMRC up to about October 2004.
In about October 2004, HMRC changed the basis for their calculation of the average interest rates for calendar year periods. Up to this time, the rates had incorporated a rounding up of the calculated rate for the calendar year to the next quarter per cent. This was apparently accepted by HMRC to be incorrect, and the basis for these average rates was amended, to exclude the rounding up referred to.
It is important that users should note that, in 2003 periods, the average interest rate calculation for calendar year periods is on the old basis. Where users wish to use the average interest rates, they will need to decide whether they wish to, or are able to, apply the average rates published by HMRC on the old basis. The alternative is, of course, to use the option for ?Specific interest calculation?, which should approximate to the average interest rate calculation on the revised basis, though users will need to satisfy themselves on this.
In this respect, it should be noted that the average interest rates on the old basis held by the system relate to 2001 and 2002 only. This is because we have been unable to verify that HMRC actually published an average rate for the calendar year 2003 on the old basis. Thus, if users wished to use the average interest rates on the old basis for the 2003 calendar year period, they would need to add the interest rate for 2003 to the rates held by the system (see ?Interest rates used? below).
In years from 2004 onwards, as a consequence of the above change in basis, there are three choices for the method of calculating interest ?
With regard to the average interest rate calculation for calendar year periods, the ?current basis? option is, of course, the one which excludes the former rounding up of the calculated rate for the calendar year to the next quarter per cent.
Whilst the option for average interest rates on the old basis has been retained in years from 2004, this is not intended to indicate that this is an available choice. Users will need to decide whether they are able to, or wish to, apply the average rates published by HMRC on the old basis.
In this respect, it should be noted that the average interest rates on the old basis held by the system relate to 2001 and 2002 only. This is because we have been unable to verify that HMRC actually published an average rate for the calendar year 2003 on the old basis. For 2004 and subsequent calendar year periods, average interest rates on the old basis will not have been published by HMRC, as the basis of calculation was changed in about October 2004. Thus, if users wished to use the average interest rates on the old basis for calendar year periods for 2003 or a later year, they would need to add interest rates to the rates held by the system (see ?Interest rates used? below).
Interest rates used
It is important to note, with regard to the interest calculation, that the interest rates held by the system may need to be updated. This is because further interest rates may have been published by HMRC since the last release of the software.
The rates held by the system can be viewed on the Tools Menu. For the rates for the ?Specific interest calculation?, users should key Tools ? CTSA interest rates ?Under payments. For the rates for the ?Average interest rate for calendar year periods?, users should key Tools ? General Insurance interest rates, then choosing ?Current basis? or ?Old basis?, as appropriate.
As noted above under ?Method of calculating interest?, average interest rates on the old basis are only held by the system for 2001 and 2002.
From the dialog box which shows the interest rates held, users are able to add interest rates, where appropriate.
Interest on excess provisions
The net interest for the period on any excess provision (or the interest credit on any deficiency of provision) is taken to the Utilisation of provisions summary schedule - here, the amounts are amalgamated for all earlier periods, before being taken to schedule A as a trade receipt or expense, in accordance with FA 2000 s 107(2), (3).
The schedule has no standard sub-schedules.
Where a new period is built, the details of the earlier period and the amounts entered for previous "later periods" will be carried forward to the new period.
However, it is important to ensure that the schedule for the current period is complete and final, as far as possible, before setting up a new period. After building the new period, any changes to figures, such as claims made or loss offsets, in the previous period will not be reflected in the new period.
It is therefore recommended that users check the new period figures for this point. Where it is felt that a figure may change, it is possible to manually enter a link from the appropriate cell in the new period to the relevant figure on the previous period schedule, to ensure that any change is reflected in the new period.
© 2009 Thomson Reuters.