LAM15410 | Excess expenses, losses and deficits:  Loss reform: companies carrying on BLAGAB- the maximum set-off of carried forward losses against total profits 1 April 2017 and 5 July 2018 CTA10/S269ZE

This section sets out how to calculate the cap on the set-off of carried forward losses against total profits for an insurer carrying on BLAGAB for the period between 1 April 2017 and 5 July 2018.

Where the company’s total profits (excluding any I-E profit) and the BLAGAB trading profits are greater than nil the maximum amount of relief the company can obtain for its relevant deductions i.e. losses carried forward for deduction from total profits is calculated in a series of steps:

1. Calculate the “BLAGAB-related loss capacity”

the “BLAGAB-related loss capacity” is equal to A + B − C where–

• A is 50% of the company’s relevant BLAGAB trade profits for the accounting period (FA12/S124D, see LAM15400)

• B is the company’s BLAGAB trade profits deductions allowance for the period

• C is the total of any deductions made by the company for the accounting period of carried forward BLAGAB losses set against BLAGAB trade profits under CTA10/S124(5), CTA10/S124A(5) and CTA10/S124C(6)

1. Calculate the “excess capacity”

The excess capacity is the amount by which-

• The total of in-year reliefs calculated under step 2 of CTA10/S269ZF(3) (see CTM05060) “is less than

• what the in-year reliefs would be if only the policyholders’ share of any I-E profit was excluded.

1. Calculate the “adjusted shareholders’ I-E profit”

The adjusted shareholders’ I-E profit is equal to–

• the shareholders’ share of the I-E profit, less

any excess capacity.

1. Confirm that the conditions in CTA10/S269ZE(2) apply

The conditions are that the company-

• has an I-E profit for the accounting period

• the policyholders’ share of the I-E profit is not the whole of that profit, and

• the adjusted shareholders’ I-E profit for the accounting period is less than the BLAGAB-related loss capacity.

If these conditions are met the maximum amount of relief the company can obtain for its relevant deductions is modified as set out in steps 5 – 7 below.

If the conditions are not met then the maximum amount of relief the company can obtain for its relevant deductions is as set out at step 7 but the loss cap is calculated as per the basic loss cap set out at step 5.

1. Calculate the “basic loss cap”

The basic loss cap is the sum of–

• 50% of the company’s “relevant profits” for the accounting period, and

• the amount of the company’s deductions allowance for the accounting period.

A company’s relevant profits (CTA10/S269ZD(5)) for an accounting period are the sum of–

• the company’s relevant trading profits for the accounting period (CTA10/S269ZF(1)),

• the company’s relevant non-trading profits for the accounting period (CTA10/S269ZF(2)), and

• the company’s relevant BLAGAB trade profits for the accounting period (FA12/S124D, see LAM15400).

The company’s relevant trading and non-trading profits are calculated under the general rules applying for this period (see CTM05050).

Where exceptionally there are trade losses carried forward that are shock losses (LAM15300) these are deducted when calculating modified total profits.

1. Calculate the “modified loss cap”

The modified loss cap is the sum of–

• the basic loss cap less the BLAGAB-related loss capacity, and

• the adjusted shareholders’ I-E profit.

1. Calculate the maximum amount of relief available for its relevant deductions

The maximum amount of relief available for its relevant deductions is:

• The modified loss cap,

Less the sum of:

• Any deductions made for restricted streamed carried-forward trading losses under CTA10/S45(4)(b) or S45B

• Any deductions made for restricted streamed non-trade loan relationship deficits under CTA09/S457(3) or S463H(5), and

• Any deductions made by the company for carried forward BLAGAB trade losses against BLAGAB trade profits under FA12/S124(5), S124A(5) and A124C(6)

Carried forward BLAGAB trade losses are a relevant deduction under CTA10/S269ZD(3) but they must be set as far as possible against BLAGAB trade profits before they can be set-off against total profits, surrendered as group relief or carried forward to a subsequent period.

Example 1

A company carries on non-BLAGAB and BLAGAB business. The period 1 April 2018 to 31 March 2019 straddles 5 July 2018. The transitional rules in FA19/PARA32 treat this accounting period as consisting of two periods.

For simplicity this example sets out the calculation for the first period with profits/losses apportioned to that period on a time basis. The deductions allowance of £2M allocated to the company for the period 1 April 2018 to 31 March 2019 is apportioned in accordance with CTA10/S269ZS(4) and rounded to £0.5M and all allocated to non-BLAGAB trading profits. The I-E profit of the period is £200M and this is all taxed at the policyholder rate.

The table below sets out the profits and losses for the company and steps in the calculation of the maximum set-off of carried forward losses against total profits. A valid claim is made to set BLAGAB trade losses carried forward against total profits.

Carried forward BLAGAB trade losses of 100.25 can be set against total profits. There will be a consequential reduction in BLAGAB management expenses FA12/S78(5) of 100.25 that would increase the I-E profits.

Example 2

A company carries on non-BLAGAB and BLAGAB business. The period 1 April 2018 to 31 March 2019 straddles 5 July 2018. The transitional rules in FA19/PARA32 treat this accounting period as consisting of two periods.

As for example 1 the calculation for the first period with profits/losses apportioned to that period on a time basis. The deductions allowance of £2M allocated to the company for the period 1 April 2018 to 31 March 2019 is apportioned in accordance with CTA10/S269ZS(4) and rounded to £0.5M and all allocated to non-BLAGAB trading profits. The I-E profit of the period is £200M.

The table below sets out the profits and losses for the company and steps in the calculation of the maximum set-off of carried forward losses against total profits. A valid claim is made to set non-BLAGAB trade losses carried forward against total profits.

Carried forward non-BLAGAB trade losses of 170.25 can be set against total profits.