Hi, I have few questions regarding XSE. 1. Can you please help me understand how 'significant fall in MV of bonds' might arise XSE situation? 2. When we are carrying minimum profit test, max of I-E and Trading profit, we are considering 100% of acquisition cost for Trading profit but only 1/7of acquisition cost for I-E computation. Is that right? Thanks!
The following thread picks up these points: https://www.acted.co.uk/forums/index.php?threads/min-profit-test.18027/
Hi I went through this link but it is still unclear a little bit. Below ques is in context of chapter 6 Taxation: In the trading profit approach expense is defined as below: "The expenses will normally be the ‘full ‘expenses, ie the acquisition expenses are not spread in the way that they might be under the ‘I-E’ approach " In the I-E approach expense is defined as : "‘E’ refers to expenses, possibly with the spread of acquisition expenses over a defined period. It might also include a carried forward amount of excess expenses from the previous tax year, referred to as ‘excess E’ or XSE." Share holder profit(P+I-E-C)+Po Profit(C-P) = I-E. It is also said that shareholder profit is equal to trading profit.(In Core Reading) When E is computed differently in both (I-E approach and TP approach) then how could we consider shareholder profit and trading profit equal? Thank you in Advance.
As set out in the link I provided, you would need to ask a tax accountant about this precise (lack of?) comparison point if you wanted a definitive answer, but (as also described in that link) do bear in mind that trading profit is taken from the company's statutory accounts, and there may well be spreading of revenue outcomes in accounts through another mechanism, such as a DAC (deferred acquisition cost) asset. I don't think it's helpful for SA2 to get hung up on the fact that the spreading isn't the same between the two approaches - that's one for the tax people to worry about! However, just to pick up on the subsequent points: taxing I-E is done as a pragmatic proxy for taxing shareholder profit (at the corporation tax rate) plus policyholder profit (at the basic rate of income tax). In order to split I-E into these two components (so that the different tax rates can be applied respectively), we set the shareholder profit component equal to trading profit. The policyholder profit component is then any additional amount of I-E over that. That's what the Core Reading is saying.
