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Minimum Profit Test

K

kntg24

Active Member
Hi,

In chapter 7 section 6.3, it is written that ‘to work out whether the minimum profits test bite, a comparison between and adjusted I-E profit and an adjusted BLAGAB trade profit is made.

What actually is the difference between adjusted I-E profit and adjusted BLAGAB trade profit?

Thank you.


Regards,
Karen
 
Hi Karen

The most important difference is that:
  • the starting point for the former (before adjustments) is I minus E, which simplistically = investment earnings minus expenses (a bit more complicated than that in practice: what is included in I and E is as defined in tax legislation: see Chapter 7 Section 5.2 for the details)
  • the starting point for the latter (before adjustments) is trading profit, which simplistically = premiums + investment earnings - expenses - claims - increase in liabilities
There are then different adjustments made to each. The most important of these is that either we have to add dividend income onto I-E or we have to deduct dividend income from the trading profit. This is because dividend income is not included in I-E but is included in trading profit, and we want to be comparing like with like. (Although tax rules formally talk about the comparison as involving an adjusted I-E with dividends added back in, it is easier to think about it as the equivalent comparison between basic I-E and trading profits with dividends deducted, since the total taxable amount should not include dividends.)

There are other miscellaneous adjustments that need to be made, particularly to the trading profit (eg carrying forward losses, subject to restrictions). These are described in Section 6.2 of Chapter 7. The table in the Appendix to Chapter 7 might also be useful, as it sets out various adjustments line by line (I-E is calculated at the top, adjusted trading profit in the lower rows).

Hope that helps?
 
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