Minimum Profits Test

[phoenix2019]

Hi,

The core reading says with regards to taxation of proprietary insurers -

The minimum profits test does not bite

This happens when the adjusted I-E profit is higher than the adjusted BLAGAB trade profit.
If the adjusted BLAGAB trade profit is less than the I–E profit, the shareholders’ share is taxed at the mainstream corporation tax rate and the balance, the policyholders’ share, is taxed at the 20% rate.
If there are BLAGAB losses in that period, the minimum profit test does not bite. If the minimum profits test does not bite, the company is said to be XSI. (If we are comparing Actual I-E, i.e. without dividend income and BLAGAB Trading Profits less FII i.e. dividend income, then BLAGAB Trading Profits less dividend income is taxed at s/h rate 19% and the Actual BLAGAB I-E @ p/h rate 20%. Is this correct? Also when we say BLAGAB losses, it means BLAGAB Trading Losses, calculated using P-C-E+I-(V1-V0)? And this Negative loss is not carried forward to the next year also. As the minimum profit test didn't bite. Correct?

 

[phoenix2019]

The minimum profits test does bite

If the adjusted BLAGAB trade profit exceeds the I-E profit, the whole of the I-E profit is taxed
at the mainstream corporation tax rate. (Again, can we just say, if the test bites, i.e. Min. Profit less dividends > Actual I-E, then BLAGAB Trading Profits less dividends is taxed at the s/h rate 19%. Rather than saying whole of the I-E profit is taxed. Is this correct?

Or since we increase the Actual I-E to equal the Minimum Profit (BLAGAB Trading Profits), by adding a minimum profit charge. And we carry this minimum profit charge to the next year and add it to the E component of the I-E calculation. It is better to say that whole of the I-E profit is taxed.

Now this minimum profit charge is not a BLAGAB Loss or BLAGAB Trading Loss? Hence it will not be subject to the new 50% loss rules?

BLAGAB Losses and XSE items are different. The E component of the XSE, can be utilised fully 100% in the next year's tax calculations and are not affected by the 50% rules. But BLAGAB losses will be subject to the new 50% rules.

Again a basic question arises, whenever a minimum profit test bites, there will be no BLAGAB Trading loss as the Minimum Profit is greater than the adjusted I-E calculation. Hence, we will never carry forward any BLAGAB losses in this scenario.

If minimum profit test doesn't bite, and BLAGAB losses have occurred. Say Actual I-E = 100 and Minimum Profit less dividends= -20, Ideally 100 would be charged @ p/h rate 20% and 20 would be carried forward as BLAGAB Losses. And 10 can be used in the following year's (t+1) BLAGAB Trading Profits/Minimum Profit calculation? And the remaining 10 can be used the next year (t+2), along with 50% of any BLAGAB loss arising in the year (t+1)?

 

[Em Francis]

Hi,

The core reading says with regards to taxation of proprietary insurers -

The minimum profits test does not bite

This happens when the adjusted I-E profit is higher than the adjusted BLAGAB trade profit.
If the adjusted BLAGAB trade profit is less than the I–E profit, the shareholders’ share is taxed at the mainstream corporation tax rate and the balance, the policyholders’ share, is taxed at the 20% rate.
If there are BLAGAB losses in that period, the minimum profit test does not bite. If the minimum profits test does not bite, the company is said to be XSI. (If we are comparing Actual I-E, i.e. without dividend income and BLAGAB Trading Profits less FII i.e. dividend income, then BLAGAB Trading Profits less dividend income is taxed at s/h rate 19% and the Actual BLAGAB I-E @ p/h rate 20%. Is this correct?

Hi
If the test does not bite, then the min profit would be taxed at the s/h rate and the difference between I-E and min profit would be taxed at the p/h rate.

Also when we say BLAGAB losses, it means BLAGAB Trading Losses, calculated using P-C-E+I-(V1-V0)? And this Negative loss is not carried forward to the next year also. As the minimum profit test didn't bite. Correct?

Yes, the phrase ‘BLAGAB losses’ would normally be referring to a trading loss. In which case, the min profit test is capped at zero and the loss can be carried forward, subject to the restrictions mentioned in the CR (eg 50% of profits).
Hope this helps.
Thanks
Em

 

[Em Francis]

The minimum profits test does bite

If the adjusted BLAGAB trade profit exceeds the I-E profit, the whole of the I-E profit is taxed
at the mainstream corporation tax rate. (Again, can we just say, if the test bites, i.e. Min. Profit less dividends > Actual I-E, then BLAGAB Trading Profits less dividends is taxed at the s/h rate 19%. Rather than saying whole of the I-E profit is taxed. Is this correct?

Or since we increase the Actual I-E to equal the Minimum Profit (BLAGAB Trading Profits), by adding a minimum profit charge. And we carry this minimum profit charge to the next year and add it to the E component of the I-E calculation. It is better to say that whole of the I-E profit is taxed.

Yes, correct but it doesn’t matter how you express it; what is important is understanding which components are taxed at which rates.

Now this minimum profit charge is not a BLAGAB Loss or BLAGAB Trading Loss? Hence it will not be subject to the new 50% loss rules?

Yes

BLAGAB Losses and XSE items are different. The E component of the XSE, can be utilised fully 100% in the next year's tax calculations and are not affected by the 50% rules. But BLAGAB losses will be subject to the new 50% rules.

Yes – although it is not always possible to fully utilise the XSE which is carried forward if the company remains in an XSE position, and so it may need to be carried forward again.

Again a basic question arises, whenever a minimum profit test bites, there will be no BLAGAB Trading loss as the Minimum Profit is greater than the adjusted I-E calculation. Hence, we will never carry forward any BLAGAB losses in this scenario.

Yes, as the CR states 'If there are BLAGAB losses in that period, the minimum profit test does not bite.' Technically there could be a situation where there is a trading loss and where I-E<0. In that case, the minimum profit is set to 0 and so effectively the company will be taxed on the higher minimum profit of 0 rather than on the (negative) I-E result, and this could be interpreted as the minimum profit test ‘biting’. And in that case there could be carried forward BLAGAB losses.

If minimum profit test doesn't bite, and BLAGAB losses have occurred. Say Actual I-E = 100 and Minimum Profit less dividends= -20, Ideally 100 would be charged @ p/h rate 20% and 20 would be carried forward as BLAGAB Losses. And 10 can be used in the following year's (t+1) BLAGAB Trading Profits/Minimum Profit calculation? And the remaining 10 can be used the next year (t+2), along with 50% of any BLAGAB loss arising in the year (t+1)?

The 20 will be compared with the following year’s profit, ie if the following year’s profit was 30 then only 15 could be utilised. And the remaining 5 c/f.
And, if the following year’s profit was 40 or higher, all of the 20 brought forward loss could be utilised.
Hope this helps.
Thanks
Em

 

[phoenix2019]

Thanks a lot Em for such well explained responses. Appreciate the prompt replies!

Your inputs have been pretty helpful and cleared a lot of doubts!​

 

[phoenix2019]

Hi
If the test does not bite, then the min profit would be taxed at the s/h rate and the difference between I-E and min profit would be taxed at the p/h rate.

Minimum Profit less dividends will be charged at he s/h rate? Right? Since dividend income is paid out of after tax profits of the company (Insurer had invested in the company by buying equities of that firm). Taxation on that would be double taxation. As the core reading, always compares Minimum Profit (BLAGAB Trading Profit which inherently includes dividend income) with Adjusted I-E figures (Actual I-E plus Dividend income), so that the comparison is like to like. But taxation should only be on the minimum profits less dividends at s/h rate and Actual I-E less min profit less dividends charged at p/h rate.

Lets consider the above with an example -

Actual or Unadjusted I-E = 100, Dividend Income = 20 Adjusted I-E = 120,
BLAGAB Trading Profit = Minimum Profit = 70 and (Min. Profit - Dividend Income = 50)

Now Min. Profit (70) compared with Adjusted I-E (120), min profit test doesn't bite. Going by interpretation of your answer, I am assuming 70 charged at s/h rate (19%) and 30 charged at p/h rate (20%).

My intuitive view, that came in my mind,
(Min. Profit - Dividend Income = 50) taxed at s/h rate and (Unadjusted I-E less 50 = 100 - 50 = 50) taxed at p/h rate (20%). Which way would the company be taxed?

 

[Em Francis]

Minimum Profit less dividends will be charged at he s/h rate? Right? Since dividend income is paid out of after tax profits of the company (Insurer had invested in the company by buying equities of that firm). Taxation on that would be double taxation. As the core reading, always compares Minimum Profit (BLAGAB Trading Profit which inherently includes dividend income) with Adjusted I-E figures (Actual I-E plus Dividend income), so that the comparison is like to like. But taxation should only be on the minimum profits less dividends at s/h rate and Actual I-E less min profit less dividends charged at p/h rate.

Lets consider the above with an example -

Actual or Unadjusted I-E = 100, Dividend Income = 20 Adjusted I-E = 120,
BLAGAB Trading Profit = Minimum Profit = 70 and (Min. Profit - Dividend Income = 50)

Now Min. Profit (70) compared with Adjusted I-E (120), min profit test doesn't bite. Going by interpretation of your answer, I am assuming 70 charged at s/h rate (19%) and 30 charged at p/h rate (20%).

My intuitive view, that came in my mind,
(Min. Profit - Dividend Income = 50) taxed at s/h rate and (Unadjusted I-E less 50 = 100 - 50 = 50) taxed at p/h rate (20%). Which way would the company be taxed?

Hi
Yes, when I say min profit, I mean min profit adjusted for shareholder’s share. As the CR states: 'To reach the shareholders’ share, the BLAGAB trade profit must be adjusted for the shareholders’ share of dividends. '

When you do the comparison you would either add dividend income to I-E or deduct from min profit. But you only actually tax the unfranked profit, ie the part of profits that excludes dividends.
Hope that helps.
Thanks
Em

 

[phoenix2019]

That makes it clear