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Taxation

Discussion in 'SA2' started by Rajat gupta, Feb 26, 2022.

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  1. Rajat gupta

    Rajat gupta Ton up Member

    Hi,

    Can somebody please explain if BLAGAB accounting profit is same as Non-BLAGAB Trading Profit? Are we saying here that the formula is same but amounts (in below formula) is based on type of business included under BLAGAB or non-BLAGAB?
    P-I-C-E-(V1-V0)

    Regards,
    Rajat
     
    Rajat gupta, Feb 26, 2022
    #1
  2. Em Francis

    Em Francis ActEd Tutor Staff Member

    Yes, but don't forget that if we are using the BLAGAB trading profit to calculate the minimum profit, then adjustments would need to be made, eg remove shareholder share of dividends.
    Thanks
    Em
     
    Em Francis, Mar 4, 2022
    #2
  3. Rajat gupta

    Rajat gupta Ton up Member

    ok thanks Em Francis :)
     
    Rajat gupta, Mar 5, 2022
    #3
  4. studentactuary15

    studentactuary15 Active Member

    Hi could you or someone else tell me how the accounting profit / (loss) figure is calculated on page 26 of chapter 7 on the CMP please?
     
    studentactuary15, Aug 1, 2022
    #4
  5. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    This is the BLAGAB trading profit, which is simply taken as the BLAGAB share of the profit reported in the Companies Act accounts.
     
    Lindsay Smitherman, Aug 2, 2022
    #5
  6. nikita agarwala

    nikita agarwala Keen member

    Hi, could someone please help me understand using a numerical example of how BLAGAB and non-BLAGAB trade losses will be adjusted?

    I'm a bit confused with below lines in pg 12 and pg 23 of ch 7:

    From pg12:
    "New rules have been introduced in the UK to limit the use of brought forward losses so that they can only be offset against 50% of the profits of the company in any future year (if incurred prior to 1 April 2017) or the group (if incurred on or after 1 April 2017), subject to a £5m allowance."

    From pg 23:
    "If BLAGAB losses are carried forward, under the new loss rules only 50% of the losses will be available to reduce adjusted trade profit".

    Looks like they both are not the same.
     
    nikita agarwala, Sep 6, 2022
    #6
  7. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Hi - I agree they look like they are different, but believe they are actually referring to the same thing. The first wording is more accurate.

    The way in which the Core Reading has expressed the second point could be better, but I think it is basically saying the same thing but in a much higher-level and approximate way. Previously companies could potentially use 100% of their losses to offset profits, now there is a 50% restriction in place. But the restriction is applied to the amount of profits, not the amount of losses - which is why the way in which the second Core Reading point has been worded feels a tad misleading.

    Ignoring the bit about the £5m allowance (and working in £m): if we made a loss of 500 last year and a profit of 500 this year, we used to be able to offset all of that loss against this year's profit for tax purposes. Now we can only offset half of the profit, so can only use half (250) of the earlier loss and would have profit left this year of 250. [Bringing the £5m in means that there would actually be losses b/f of 5+495/2, leaving taxable profit of 247.5]

    So the wording kind of works in the above example, but of course wouldn't where we don't have previous loss = current profit. However, I think it's just a (slightly clumsy?) short-hand way of trying to say the same thing.
     
    Lindsay Smitherman, Sep 7, 2022
    #7
  8. nikita agarwala

    nikita agarwala Keen member

    Thank you for your reply @Lindsay Smitherman

    so are you saying wording in pg 12 are new rules that holds for both BLAGAB and Non-BLAGAB trade losses?

    Taking below 2 examples:
    Example #1: If loss = 500 in year X-1 and profit = 300 in year X. Then Loss that could be carried forward to year X is restricted to 5 +295/2 = 152.5. Taxable profit in year X = 300-152.5 = 147.5

    Example #2: if loss = 150 in year X-1 and profit = 450 in year X. Then then Loss that could be carried forward to year X is restricted to 5 +450/2 = 247.5. Since loss in year X-1 =150 is less than 5 million plus 50% of the profits in excess of 5m in year X, so it's use is not restricted. So Taxable profit in year X = 450-150 = 300

    and could I say both these examples holds for BLAGAB and Non-BLAGAB trade losses?
     
    nikita agarwala, Sep 7, 2022
    #8
    1495_sc likes this.
  9. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    What I am saying is that there is an implication in the Core Reading that they are the same, since the second point (about BLAGAB) refers to 'the new 50% loss rules', and what has been described for non-BLAGAB is the only other reference given to what 'the' new 50% loss rules could be.

    So based on the Core Reading alone (which is what the exams are based on), and avoiding going drilling down into actual tax legislation (which would be unreasonable to expect of SA2 students!), it seems safe to assume they work in the same way for the purposes of the SA2 exam.

    There might well be some technical differences or differences in detail, but broadly we believe that the rules work in the same way for both BLAGAB and non-BLAGAB trading losses carried forward.

    Your numbers seem OK except for the second one I think the restricted amount should be 5 + 445/2 = 227.5?
     
    Lindsay Smitherman, Sep 7, 2022
    #9
  10. nikita agarwala

    nikita agarwala Keen member

    Hi, I have another question on taxation. Could you help please?

    April 2020 past paper ASET, Solution 3ii:
    1. What does it mean by 'netting down expenses in premiums' in below line?
    2. Also, why would a company with XSI net down their expenses in premium calculation as compared with a company with XSE?
    3. What is the advantage of doing this to the company and policyholder?

    "It may be difficult for companies who only sell this type of product to compete ... ... with other companies whose I exceeds E (XSI), ... ... as the latter can net down their expenses in their premiums."
     
    nikita agarwala, Sep 7, 2022
    #10
  11. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    See Chapter 23 Section 3.7 - should help to answer this for you
     
    Lindsay Smitherman, Sep 7, 2022
    #11
  12. nikita agarwala

    nikita agarwala Keen member

    Thanks Lindsay. I agree the second one should have restricted amount of 227.5
     
    nikita agarwala, Sep 7, 2022
    #12
  13. nikita agarwala

    nikita agarwala Keen member

    I'm sorry Lindsay. Could you please help understand me? I'm not able to follow reading from ch 23..
     
    nikita agarwala, Sep 7, 2022
    #13
  14. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    'netting down' means deducting tax
    If a company is XSI, it has more I than E, so can achieve full tax relief on its expenses (E). It therefore incurs expenses net of tax, and so when it is pricing it can do so using net (of tax) expenses. Hence can charge lower premiums than if it was pricing using gross (of tax) expenses.
    If a company is XSE, it doesn't have enough I to offset all of its E, so it isn't receiving full tax relief on its expenses. So higher premiums.
     
    Lindsay Smitherman, Sep 7, 2022
    #14
  15. nikita agarwala

    nikita agarwala Keen member

    Thanks Lindsay. May I ask why companies are writing lower levels of new BLAGAB business (e.g. endowment?)
     
    nikita agarwala, Sep 8, 2022
    #15
  16. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    Term assurance used to be included in BLAGAB, but no longer is (since start of 2013) - so that's one reason.

    And fewer endowment assurances being sold in the UK than was the case in the past, particularly with-profits ones. They used to be sold to support mortgages but then fell out of favour when the loan repayments failed to be covered and many individuals were deemed to have been mis-sold the endowment policy (mentioned in Chapter 4).
     
    Lindsay Smitherman, Sep 8, 2022
    #16
  17. studentactuary15

    studentactuary15 Active Member

    Hi Lindsay,

    How do structurally XSE companies benefit from such a position? I know this is explained in Q3 on September 2021 but I didn't understand it fully. I see that it gives "untaxed investment income in pricing of the savings product" - what does this mean? Lower premiums? Since there will be bigger investment income cashflows?

    Q2iv on April 2010 is about a company moving from XSI to XSE and the impact it will have on its sales. XSE will make them charge higher premiums (like you said) but it doesn't mention anything about higher investment income from XSE. The mark scheme actually says "An incorrect, but common theme coming out of the answers was... investment income and would be advantageous to the company". For this question, I would have thought that the savings pension product could be impacted favourably but the term assurance impacted adversely.

    Thank you
     
    studentactuary15, Sep 9, 2022
    #17
  18. 1495_sc

    1495_sc Ton up Member

    Hello- I have a follow up question for non-BLAGAB tax. Following scenarios are mentioned for offsetting loss against profit in Core Reading.

    1.carried back for twelve months and offset against the prior year profits of the same company
    2.offset against other profits of the company in the same period in which they were incurred
    3.offset against other profits of the group in the same period in which they were incurred, or
    4.carried back for twelve months and offset against the prior year profits of the same company

    I believe that we discussed numerical example for case#4 + incorporating new UK rule of 5m allowance+ 50% profit.

    I did not follow how #1 and #2 can be effected in reality.
    #1- How can we practically adjust last year's profits in current financial year?
    #2- what is 'other profits' here? The company can either earn profit or incur a loss in a given year. Are we referring to something else as 'profit' here?

    Please help.
     
    1495_sc, Sep 11, 2022
    #18
  19. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    #2 - please see this post: https://www.acted.co.uk/forums/index.php?threads/offset-of-non-blagab-losses.15613/

    #1 - probably needs a tax practitioner to answer, but I can imagine that there are rules in place allowing amendments to be made to prior year tax returns for a certain period of time, for example to deal with any errors that might have been discovered (with refunds or additional payments being made as necessary)
     
    Lindsay Smitherman, Sep 12, 2022
    #19
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  20. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    If the XSE company decides to write some savings business (with I>E), it can use its excess E to offset the extra I that is being generated. Hence that extra I isn't taxable, so we can allow for it gross (of tax) in the pricing. Higher investment return assumed in pricing -> lower premium rates (if conventional business) or lower charges (if unit-linked).
     
    Lindsay Smitherman, Sep 12, 2022
    #20
    studentactuary15 likes this.
  21. Lindsay Smitherman

    Lindsay Smitherman ActEd Tutor Staff Member

    The company has only ever written term assurance business (which is typically XSE, if within the BLAGAB fund - which note is no longer the case for term assurance business written since the start of 2013). Investment earnings are immaterial on such business (very low reserves) and so make very little difference to pricing, therefore not a consideration.
     
    Lindsay Smitherman, Sep 12, 2022
    #21
    studentactuary15 likes this.
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