Minimum profit test

[SABeauty]

Hi

I understand the minimum profit test in a way. But why do we actually have it? Why don't the companies just get taxed on actual profits arising from I - E computation?

Also how is that minimum profit calculated for companies? Does it differ, or is it standard for everyone?

Thanks

 

[dok87]

Recall BLAGAB "I-E" profits (Computation) can be shown to be an aggregate of shareholder profits and policyholder profits, and recall both have different tax rates - for this April exam 24% and 20% respectively. The question is where should the marker to split the I-E profits between s/h & p/h be placed?

To deal with this, HMRC has attempted to treat life insurers similar to any other trading company by defining what it thinks should be the company's taxable profit had the usual rules applied - the result is the "Minimum Profits". This is essentially the surplus arising (FSA Basis - Form 40 so broadly similar rules for all life insurers), noting that policyholder's share (bonus) has to be excluded.

So HMRC wants to make sure that the company pays shareholder tax (corporation tax) on this amount (Minimum profits) as if it were any other company. Any extras is then treated as policyholder profits so attracts the policyholder tax rate (20%). If however this minimum profit exceeds the BLAGAB Profit then the shortfall is carried forward as XSE with no policyholder taxable profits arising.

Hope it helps!