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NC1 test

A

Alapmehra

Member
What is the logic behind the nc1 profit being compared with an adjusted I-E calculation instead of the regular I-E? The adjustment is to add the dividend income to the I-E, so there is a possibility that NC1 <( I-E + dividend) but NC1 > I-E. so in this case the test doesn't 'bite', so what is done in this case?
 
The NCI profit test is compared to an adjusted I-E calculation so that we are comparing like for like. The dividend income will already be included in the NCI profit and so by excluding it from the I-E calculation the two sides are not equivalent.

In the case you mention the NCI profit test wouldn’t bite, so we’d pay tax on I-E. It doesn’t matter that the NCI profit is bigger than I-E, because we deduct dividends from NCI before paying tax if the test bites. Effectively the insurer pays tax on the larger of I-E and NCI less dividends (its just that HMRC use a rather long-winded formula to get there).

Hope this helps :)

Sarah
 
Thanks a lot Sarah, that clears things out. There is a question in the course notes that illustrates this to some extent, I just didn't appreciate the subtleties. I'd just like to say that these forums are really useful and it is very kind of you acted tutors to answer students doubts so promptly.
 
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