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BLAGAB minimum profits

S

student2012

Member
Hi - I've few queries pertaining to BLAGAB minimum profits.
  • While calculating minimum profits, deduction has to be made in respect of policyholder's current or deferred tax. Why is it required?
    Presumably, policyholder tax is based on profit calculated as C-P, however Appendix 7 calculates it as (I-E) - Minimum profit which appears to be cross circularity in calculation.

  • Treatment of BLAGAB losses in Section 6.2: Does BLAGAB losses refer to I-E losses or shareholders' loss within I-E? Shouldn't it refer to the former, however it looks like it refers to the latter.

  • I-E in Year t is 1000, minimum profit = 400, policyholders' share = 600. Company was in XSE in Year t-1 to the extent of 200. In Year t, minimum profit is reduced by 100 (subject o 50% rule), policyholders should still be charged tax at 600. Is this correct?

  • Question 7.3: Year X: Can Non-BLAGAB losses be sett off against BLAGAB profit as per Non-BLAGAB set off rules? If it can be then set off should be against minimum profits of BLAGAB (400-150 = 250), with no change in policyholders' share (300).
    Year X+2: Isn't the treatment of 50% rule incorrect, shouldn't be 400 - 75 (50% of 150) = 325?

  • On a different note, is there any adjustment of reinsurance in Non-BLAGAB as is done in BLAGAB?
 
Last edited by a moderator:
student2012 said:
Hi - I've few queries pertaining to BLAGAB minimum profits.
  • While calculating minimum profits, deduction has to be made in respect of policyholder's current or deferred tax. Why is it required?
    Presumably, policyholder tax is based on profit calculated as C-P, however Appendix 7 calculates it as (I-E) - Minimum profit which appears to be cross circularity in calculation.

  • Treatment of BLAGAB losses in Section 6.2: Does BLAGAB losses refer to I-E losses or shareholders' loss within I-E? Shouldn't it refer to the former, however it looks like it refers to the latter.

  • I-E in Year t is 1000, minimum profit = 400, policyholders' share = 600. Company was in XSE in Year t-1 to the extent of 200. In Year t, minimum profit is reduced by 100 (subject o 50% rule), policyholders should still be charged tax at 600. Is this correct?

  • Question 7.3: Year X: Can Non-BLAGAB losses be sett off against BLAGAB profit as per Non-BLAGAB set off rules? If it can be then set off should be against minimum profits of BLAGAB (400-150 = 250), with no change in policyholders' share (300).
    Year X+2: Isn't the treatment of 50% rule incorrect, shouldn't be 400 - 75 (50% of 150) = 325?

  • On a different note, is there any adjustment of reinsurance in Non-BLAGAB as is done in BLAGAB?
Click to expand...
student2012 said:
Hi - I've few queries pertaining to BLAGAB minimum profits.

  • While calculating minimum profits, deduction has to be made in respect of policyholder's current or deferred tax. Why is it required?
    Presumably, policyholder tax is based on profit calculated as C-P, however Appendix 7 calculates it as (I-E) - Minimum profit which appears to be cross circularity in calculation.
Click to expand...
It is required to avoid double taxation.

I agree the table is circular and some kind of approximation will be required to avoid this, for example adjusted prior yr figures or ,as you say, looking at claims and premiums.



student2012 said:
  • Treatment of BLAGAB losses in Section 6.2: Does BLAGAB losses refer to I-E losses or shareholders' loss within I-E? Shouldn't it refer to the former, however it looks like it refers to the latter.
Click to expand...
It refers to both whereas trade losses will refer to shareholder, this is what section 6.2 is referring to.

  • student2012 said:
    [*]I-E in Year t is 1000, minimum profit = 400, policyholders' share = 600. Company was in XSE in Year t-1 to the extent of 200. In Year t, minimum profit is reduced by 100 (subject o 50% rule), policyholders should still be charged tax at 600. Is this correct?
    Click to expand...
Using I-E =1000 and min profit = 400, then yes 400 will be taxed at s/h rate and 600 at p/h rate.

But if company was XSE in yr X-1 and this has not been taken into account in the above 1000, then 200 will be added to E and so I-E will reduce to 800, when compared with 400 - the min profit still does not bite so 400 will still be taxed at s/h rate but only 400 at p/h rate. Please note XSE is not the same as BLAGAB losses so no need to apply 50% test.

student2012 said:
  • Question 7.3: Year X: Can Non-BLAGAB losses be sett off against BLAGAB profit as per Non-BLAGAB set off rules? If it can be then set off should be against minimum profits of BLAGAB (400-150 = 250), with no change in policyholders' share (300).
    Year X+2: Isn't the treatment of 50% rule incorrect, shouldn't be 400 - 75 (50% of 150) = 325?
Click to expand...
I am not sure where you are getting these numbers from, there were no X-1 Non-BLAGAB losses . 150 relates to Non-BLAGAB losses from yr X which is then offset against non-BLAGAB profit in yr X+1. The 50% restriction doesn't bite as 50% of the non-BLAGAB profits of 450 (225) is greater than the 150 losses brought forward.

[/QUOTE]

student2012 said:
  • On a different note, is there any adjustment of reinsurance in Non-BLAGAB as is done in BLAGAB?
Click to expand...


Possibly, although you are not expected to know this for SA2.

[/QUOTE]


Hope this helps.


Thanks

Em
 
student2012 said:
  • I-E in Year t is 1000, minimum profit = 400, policyholders' share = 600. Company was in XSE in Year t-1 to the extent of 200. In Year t, minimum profit is reduced by 100 (subject o 50% rule), policyholders should still be charged tax at 600. Is this correct?
Click to expand...

Hi - just to add a further small point to avoid any potential misunderstanding here: where you say 'policyholders should still be charged tax at 600' we need to be a little careful with phrasing. It is the company, not the policyholders, who have to pay the tax on this amount. The split between the shareholder and policyholder shares determines how much is taxed at each of the two different tax rates that are applied: the corporation tax rate and the 'policyholder' (ie basic income tax) rate. Both of these tax amounts are, however, paid by the insurance company.
 
Thank you Em and Lindsay for your replies. I have taken some numerical examples to better explain my queries. It will be great if you can see this when you have time since there are a quite a few examples (I understand it may take some time to respond to all or some of these). Thank you.

Em Francis said:
It is required to avoid double taxation.
I agree the table is circular and some kind of approximation will be required to avoid this, for example adjusted prior yr figures or ,as you say, looking at claims and premiums.
Click to expand...

I am trying to understand how it avoids double taxation with the help of an example.
SHP = P + I -E - C
= 100 + 50 - 5 - 120 = 25

PHP = C - P = 20
I - E = 45
If s/h share of 25 and p/h share of 20 is charged at their respective rates then there I think there should be no double taxation within the overall I - E. I think p/h tax of 4 (charged at say 20% on p/h profit of 20) is deducted from s/h profit to allow it as an "expense" item from s/h profit which effectively gets added in p/h share. Effectively, p/h tax rate is charged on p/h profit+tax on p/h profit (20 + 4 = 24). Am I missing something?

Em Francis said:
It refers to both whereas trade losses will refer to shareholder, this is what section 6.2 is referring to.
Click to expand...

Sorry, I think I should have been more specific in my query. In Section 6.2 (6th para of core reading), "Where BLAGAB losses arise in a period, there will be no shareholders' share". I think here, BLAGAB losses means BLAGAB trade losses i.e. shareholders' loss (and not that BLAGAB loss means I-E is negative).

I am trying to understand how effect of 50% rule impacts p/h share. I've taken an example below.
Year X:
SHP = P + I -E - C
= 100 + 90 - 80 - 130 = -20 (BLAGAB loss)
PHP = C - P = 30
I - E = 10
I think tax should be charged on PHP of 30 (and not I-E = 10) when BLAGAB loss is carried forward to the next year.

Year X+1:
SHP = P + I -E - C
= 100 + 90 - 30 - 130 = +30 (BLAGAB trade profit)
PHP = C - P = 30
I - E = 60

S/H share of tax:
50% of 30 (=15) < 20 (20 is loss incurred in Year X), hence carried forward adj to be restricted to 15. Hence, s/h tax rate applied on 15.
Whereas, p/h tax rate applied on C-P (=30).
So how does amount taxed at p/h rate reduces as mentioned in the core reading?

Em Francis said:
I am not sure where you are getting these numbers from, there were no X-1 Non-BLAGAB losses . 150 relates to Non-BLAGAB losses from yr X which is then offset against non-BLAGAB profit in yr X+1. The 50% restriction doesn't bite as 50% of the non-BLAGAB profits of 450 (225) is greater than the 150 losses brought forward.
Click to expand...

Here, I am referring to whether Non-BLAGAB losses (-150) can be offset against BLAGAB trade profits (400) of a particular year. The reason I ask is because within rules on Non-BLAGAB losses (Section 4.2), it states "Non-BLAGAB losses can be offset against other profits of the company in the same period in which they are incurred."

Hence, if this is the case then s/h charged at 400-150 = 250.
Whereas, p/h share should be still be charged at (I-E) - BLAGAB profit (where no non-BLAGAB adj is applied) i.e. 700-400 = 300. This is because non-BLAGAB adj of losses should only impact s/h share.
 
student2012 said:
Thank you Em and Lindsay for your replies. I have taken some numerical examples to better explain my queries. It will be great if you can see this when you have time since there are a quite a few examples (I understand it may take some time to respond to all or some of these). Thank you.



I am trying to understand how it avoids double taxation with the help of an example.
SHP = P + I -E - C
= 100 + 50 - 5 - 120 = 25

PHP = C - P = 20
I - E = 45
If s/h share of 25 and p/h share of 20 is charged at their respective rates then there I think there should be no double taxation within the overall I - E. I think p/h tax of 4 (charged at say 20% on p/h profit of 20) is deducted from s/h profit to allow it as an "expense" item from s/h profit which effectively gets added in p/h share. Effectively, p/h tax rate is charged on p/h profit+tax on p/h profit (20 + 4 = 24). Am I missing something?
Click to expand...

You are using very simplified calculations for s/h and p/h share. Other components may be included in the SHP. And this is what the CMP is referring to:
... minus any current and deferred tax arising from the policyholders’ share of the I-E result.
student2012 said:
Sorry, I think I should have been more specific in my query. In Section 6.2 (6th para of core reading), "Where BLAGAB losses arise in a period, there will be no shareholders' share". I think here, BLAGAB losses means BLAGAB trade losses i.e. shareholders' loss (and not that BLAGAB loss means I-E is negative).

I am trying to understand how effect of 50% rule impacts p/h share. I've taken an example below.
Year X:
SHP = P + I -E - C
= 100 + 90 - 80 - 130 = -20 (BLAGAB loss)
PHP = C - P = 30
I - E = 10
I think tax should be charged on PHP of 30 (and not I-E = 10) when BLAGAB loss is carried forward to the next year.

Year X+1:
SHP = P + I -E - C
= 100 + 90 - 30 - 130 = +30 (BLAGAB trade profit)
PHP = C - P = 30
I - E = 60

S/H share of tax:
50% of 30 (=15) < 20 (20 is loss incurred in Year X), hence carried forward adj to be restricted to 15. Hence, s/h tax rate applied on 15.
Whereas, p/h tax rate applied on C-P (=30).
So how does amount taxed at p/h rate reduces as mentioned in the core reading?
Click to expand...

I would advise comparing I-E with min profit not PHP and then tax at the maximum amount.
In your example,
YR X:
SHP = 0
I-E = 10
C/F 20
YR X+1:
Not all 20 can be used as > 50% of 30. As a result can only net down by 15, resulting in SHP = 30-15=15.
I-E=60
So tax 15 at s/h rate and 45 at p/h rate.
If the restriction didn't apply, 10 would be at s/h rate and 50 at p/h rate. Therefore the restriction has reduced the amount taxed at the p/h rate (from 50 to 45) and increased that at the s/h rate (from 10 to 15). In the UK's current tax regime, this will result in lower taxation as p/h rate > s/h rate.
student2012 said:
Here, I am referring to whether Non-BLAGAB losses (-150) can be offset against BLAGAB trade profits (400) of a particular year. The reason I ask is because within rules on Non-BLAGAB losses (Section 4.2), it states "Non-BLAGAB losses can be offset against other profits of the company in the same period in which they are incurred."

Hence, if this is the case then s/h charged at 400-150 = 250.
Whereas, p/h share should be still be charged at (I-E) - BLAGAB profit (where no non-BLAGAB adj is applied) i.e. 700-400 = 300. This is because non-BLAGAB adj of losses should only impact s/h share.
Click to expand...

The question specifically states that "Non BLAGAB losses were carried forward to be offset agianst non-BLAGAB profits in year X+1" so you would only use the 150 to offset the 450 in yr X+1 (subject to the 50% cap).
As 150 <225 then the full amount can be used. However, if the question had said they could be used in the same year, then yes you could net down the accounting profit of 400.
 
Em Francis said:
You are using very simplified calculations for s/h and p/h share. Other components may be included in the SHP. And this is what the CMP is referring to:
... minus any current and deferred tax arising from the policyholders’ share of the I-E result.


I would advise comparing I-E with min profit not PHP and then tax at the maximum amount.
In your example,
YR X:
SHP = 0
I-E = 10
C/F 20
YR X+1:
Not all 20 can be used as > 50% of 30. As a result can only net down by 15, resulting in SHP = 30-15=15.
I-E=60
So tax 15 at s/h rate and 45 at p/h rate.
If the restriction didn't apply, 10 would be at s/h rate and 50 at p/h rate. Therefore the restriction has reduced the amount taxed at the p/h rate (from 50 to 45) and increased that at the s/h rate (from 10 to 15). In the UK's current tax regime, this will result in lower taxation as p/h rate > s/h rate.


The question specifically states that "Non BLAGAB losses were carried forward to be offset agianst non-BLAGAB profits in year X+1" so you would only use the 150 to offset the 450 in yr X+1 (subject to the 50% cap).
As 150 <225 then the full amount can be used. However, if the question had said they could be used in the same year, then yes you could net down the accounting profit of 400.
Click to expand...
Em Francis said:
You are using very simplified calculations for s/h and p/h share. Other components may be included in the SHP. And this is what the CMP is referring to:
... minus any current and deferred tax arising from the policyholders’ share of the I-E result.


I would advise comparing I-E with min profit not PHP and then tax at the maximum amount.
In your example,
YR X:
SHP = 0
I-E = 10
C/F 20
YR X+1:
Not all 20 can be used as > 50% of 30. As a result can only net down by 15, resulting in SHP = 30-15=15.
I-E=60
So tax 15 at s/h rate and 45 at p/h rate.
If the restriction didn't apply, 10 would be at s/h rate and 50 at p/h rate. Therefore the restriction has reduced the amount taxed at the p/h rate (from 50 to 45) and increased that at the s/h rate (from 10 to 15). In the UK's current tax regime, this will result in lower taxation as p/h rate > s/h rate.


The question specifically states that "Non BLAGAB losses were carried forward to be offset agianst non-BLAGAB profits in year X+1" so you would only use the 150 to offset the 450 in yr X+1 (subject to the 50% cap).
As 150 <225 then the full amount can be used. However, if the question had said they could be used in the same year, then yes you could net down the accounting profit of 400.
Click to expand...
Em Francis said:
You are using very simplified calculations for s/h and p/h share. Other components may be included in the SHP. And this is what the CMP is referring to:
... minus any current and deferred tax arising from the policyholders’ share of the I-E result.


I would advise comparing I-E with min profit not PHP and then tax at the maximum amount.
In your example,
YR X:
SHP = 0
I-E = 10
C/F 20
YR X+1:
Not all 20 can be used as > 50% of 30. As a result can only net down by 15, resulting in SHP = 30-15=15.
I-E=60
So tax 15 at s/h rate and 45 at p/h rate.
If the restriction didn't apply, 10 would be at s/h rate and 50 at p/h rate. Therefore the restriction has reduced the amount taxed at the p/h rate (from 50 to 45) and increased that at the s/h rate (from 10 to 15). In the UK's current tax regime, this will result in lower taxation as p/h rate > s/h rate.


The question specifically states that "Non BLAGAB losses were carried forward to be offset agianst non-BLAGAB profits in year X+1" so you would only use the 150 to offset the 450 in yr X+1 (subject to the 50% cap).
As 150 <225 then the full amount can be used. However, if the question had said they could be used in the same year, then yes you could net down the accounting profit of 400.
Click to expand...

Just a concern, if the question did not mention anything on whether to carry forward or use the non blagab loss in the same year. Then what shall the student do? Carry it forward into next year to offset against non-blagab profit of year X+1? Or offset with year X Blagab trading profits/accounting profits? What would be advisable, if the info is not given the question?
 
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