Although July and August may seem a long way off, the work on transition should be completed sooner rather than later. It is unlikely that the new regime will be substantively enacted by 30 June, but disclosure may be required in both the IFRS and EV half year results if the change has a material impact. There are two angles to be considered:
- estimating the quantum of one off shareholder profits either taxed or relieved over a 10-year period beginning 1 January 2013, and
- the recurring impact arising as a result of allocating investment income and gains on a commercial basis rather than a standard formula.
The first of these arises from the difference in the shareholder profits measured on the two different bases (FSA and GAAP). This may not simply be the acceleration of deferred tax in the GAAP accounts into current tax, because previously non-taxable amounts such as inadmissible assets, (that have been treated as permanent differences), will come within the charge to tax. The transitional profit could be estimated using the differences between the 2011 FSA surplus and the retained profit in the 2011 financial statements.
If the Effective Tax Rate is a key performance metric for the tax director, perhaps this should be renegotiated to exclude the transitional amounts (if the impact is adverse)?
The Finance Bill contains a number of improvements to the draft legislation released in December, although we will not know the full position until we see the long awaited regulation.
The second angle arises from the move to commercial allocation. This will assign 100% of the investment return to the different categories of business and may result in winners and losers as the interaction between s432A and s432B ICTA fractions is consigned to history. The question is, will you be one of the winners?
The impact of the new formula for determining the shareholder share of BLAGAB dividends should also not be forgotten, as tax directors seek to explain the new tax charge.
The change to the apportionment method could impact systems. The actuaries should already allocate assets to back policyholder liabilities, but can this be conveyed to the tax department in the required timescale for reporting and how do you allocate the remaining assets for tax purposes? These are not questions that the tax department can resolve in isolation, so engagement and buy-in of actuaries, accountants and potentially the IT department is needed.
- Quantify the transitional adjustment using the 2011 financial statements and FSA return, even if non-calendar year end, and identify any amounts that appear to be inadvertently taxed.
- Discuss the adjustment with your CRM and agree a course of action.
- Evaluate the methods of commercially allocating income and profits open to the company and establish whether or not these are feasible within the reporting timetable.
- Consider both adjustments on the tax profile of the company and how this impacts EV reporting and the disclosure in the 30 June 2012 results.
