707 Management expenses

Summary

Relief is available to life assurance companies in respect of management expenses where the company is not charged to tax under Case I of Schedule D but rather under what is known as the Income less Expenses basis (I–E). The relief is subject to the limitation that the tax borne after the allowance of management expenses must not be less than would have been payable by the company if the profits of the company had been charged to tax under Case I of Schedule D like other trading companies.

(All life assurance business commenced on or after 1 January 2001 is taxed under Case I of Schedule D – see section 730A.)

Details

(1) In computing, otherwise than on a “Case I” basis, the profits of a company carrying on a life business, section 83 (expenses of management of investment companies) applies to give relief in respect of management expenses incurred. However, any repayments, refunds, reinsurance commissions and fines, fees and profits from reversions must be netted off against the management expenses to arrive at the net amount eligible for relief. In calculating profits from reversions the company may set off any unrelieved losses from reversions in previous periods. The amount of the management expenses is not reduced by the amount of any income exempt from tax unless the income concerned (other than receipts from premiums) would be included in a Case I computation, and that reduction is not regarded as reducing acquisition expenses, within the meaning of section 708.

(2) The different classes of life assurance business (namely, pension business, general annuity business and other life assurance business) are treated as separate businesses in their own right for the purposes of the set off of management expenses. For example, excess pension business management expenses cannot be deducted from the income and gains of basic life assurance business but must be carried forward to subsequent accounting periods and set off against pension business income and gains in those periods. This ring-fencing of management expenses does not apply to any expenses carried forward from accounting periods ending before 27 May, 1986. In the case of such expenses, the company can elect to set them off, to whatever extent it wishes, against the profits of any one or more of the four classes of business.

(4) The deduction for management expenses cannot result in the corporation tax on a life assurance company’s life business for any accounting period being reduced below what it would have been had it been taxed at the standard rate of corporation tax under Case I of Schedule D (that is, a notional Case I computation is required for comparison purposes). Any management expenses unrelieved as a result of this comparison can be carried forward for set off in subsequent accounting periods. This ensures that the minimum tax liability of such companies cannot fall below the amount chargeable on shareholders’ profits.

(5)(a)(iv) If a loss arises to the assurance company, investment income (including franked investment income of the life assurance fund) is included as trading income. A deduction may be claimed under Case I in respect of the part of the profits allocated to policyholders. Franked investment income is taken into account when calculating the notional Case I tax but to the extent that such income is reserved for policyholders it is not charged to tax.

(5)(b) The fact that management expenses are deductible under section 83 does not preclude them from being allowed in the notional Case I computation under subsection (4).

Relevant Date: Finance Act 2021