LAM07230 | Trade profits: BLAGAB trade profits: minimum profits test: FA12/S93

The objective of the minimum profits test is to ensure that the taxable income of an insurance company is at least equal to the BLAGAB trade profit (excluding dividends) for the period even where the I-E profit would otherwise be a lower amount. The test identifies whether there are adjusted BLAGAB profits in excess of the amount of adjusted I-E profit (or excess BLAGAB expense). If that is the case step 3 of FA12/S73 brings an I-E receipt into charge representing that excess and a corresponding amount is carried forward as an expense to the company’s next accounting period.

The rationale behind the test is that all profit attributable to shareholders must be taxed. If profits under the I-E basis are lower than BLAGAB trade profits, then the minimum profits test will adjust the I-E profit to at least the level of trade profits.

The test works by comparing the I-E profit (or excess BLAGAB expense) with the BLAGAB trade profit.

Where there are excess BLAGAB expenses (excess E) these are treated for the purposes of the FA12/S93 minimum profits test calculation as a negative amount.

Before making this comparison an adjustment is required in respect of any exempt dividends. This is necessary because portfolio shareholdings are trading stock of the insurance business and therefore those dividends are included in calculation of the BLAGAB trade profit. In contrast I-E profits are calculated on an investment business basis and so the income only includes taxable dividends.

FA2/S94 requires an adjustment where the BLAGAB trade profit includes non-taxable distributions receivable that are referable to BLAGAB business.

It requires, for this purpose only, the total amount of non-taxable distributions to be included as part of the total ‘I’ calculated in Step 4 of FA12/S73.

If adjusted BLAGAB trade profits (after losses b/f) exceed the adjusted I-E profit or excess BLAGAB expenses then an amount equal to the difference is an I-E receipt of the company and the same amount is carried forward to the company’s next accounting period as an expense.

Example 1:

BLAGAB trade profit (FA12/S93) £50 (after losses b/f)

BLAGAB non-taxable distributions (FA12/S94) £15

I-E Profit £25

Minimum profits charge is £10 (£50 – (£25 +£15))

The minimum profits charge of £10 will be treated as an I-E receipt and £10 will be carried forward as a BLAGAB management expense. The total I-E profits, including the minimum profit charge, will be £35.

Example 2:

BLAGAB trade profit (FA12/S93) £50 (after losses b/f)

BLAGAB non-taxable distributions (FA12/S94) £15

Excess BLAGAB expenses £5

Net £10 I-E before minimum profit test

Minimum profits charge is £40 (£50 – £10)

The minimum profits charge of £40 will be treated as an I-E receipt and £40 carried forward as a BLAGAB management expense. The total I-E profits, including the minimum profit charge, will be £35.