Tax - NCI profit

[claire3000006]

I'm confused about whether GRB profits should be taxed at the corporation tax rate or the policyholder rate.

On page 5 of Chapter 7 question 7.1 says that the NCI profit (excluding dividends) is 250, which is taxed at 26%. I-E-NCI profit = 270 which is taxed at 20% and the GRB profit is 260 which is taxed at 20%.

On page 9 the NCI profit seems to include GRB profit and is compared with the total I - E + GRB, but no tax calculations are done so it doesn't necessarily contradict the above.

On page 12 it says the amount of I-E equal to NCI profit not derived from dividends is taxed at 26% and the balance taxed at 20%, which implies all GRB is taxed at 20% (unless the statement doesn't include GRB at all).

However:

Question 2(ii) in the Aprilp 2010 paper -

I = 900, E = 700, NCI = 50, GRB case VI = 100

The solution gives total taxable income = I - E + GRB = 300

NCI profit = BLAGAB NCI + GRB = 150

Shareholder share = NCI so 150 taxed at 28%
Policyholder share = 300 - 150 = 150 taxed at 20%

So here all the GRB profits have been taxed at the corporation rate, not the policyholder rate.

What is correct?

 

[claire3000006]

Also is this correct (looking at just BLAGAB and ignoring GRB)?

You compare NCI with adjusted BLAGAB I-E (including BLAGAB share of dividends) when deciding whether to restrict E and how much by.

The NCI profit less BLAGAB share of dividends is what's taxed at corporation rate and the original I-E minus this amount is what's taxed at policyholder rate?

 

[Mark Willder]

Also is this correct (looking at just BLAGAB and ignoring GRB)?

You compare NCI with adjusted BLAGAB I-E (including BLAGAB share of dividends) when deciding whether to restrict E and how much by.

The NCI profit less BLAGAB share of dividends is what's taxed at corporation rate and the original I-E minus this amount is what's taxed at policyholder rate?

Yes, if we only have BLAGAB business, the NCI profit less dividends is taxed at the corporation tax rate. If I-E is greater than NCI profit less dividends then, then the excess is taxed at the policyholder rate.

Best wishes

Mark

 

[Always Trying]

Hi Clare,

Were you able to work out what tax rate the GRB profits are taxed on?

I also find the two solutions conflicting. I think I will go with the method in the exam solutions if we aren't able to get a definitive answer.

Thanks, Always Trying

 

[Mark Willder]

Real life tax calculations are more complicated than the methodology shown in the course. Fortunately the Core Reading states that it doesn't require us all to be tax experts.

For example, there are lots of odd things that happen with the allocation of dividends between BLAGAB and GRB and between policyholder and shareholder. It will be these kinds of oddities that explain some of the problems you've had with the examples. The good news is that allocating dividends is beyond the syllabus and the examiners tend to ignore dividends altogether in their questions.

I'm confused about whether GRB profits should be taxed at the corporation tax rate or the policyholder rate.

If there was only GRB then it would be taxed at 26%. But you need to apply the minimum tax test if there's BLAGAB which may modify things slightly.

On page 5 of Chapter 7 question 7.1 says that the NCI profit (excluding dividends) is 250, which is taxed at 26%. I-E-NCI profit = 270 which is taxed at 20% and the GRB profit is 260 which is taxed at 20%.

No this is not right. The NCI profit referred to in the question applies to the total NCI profit for BLAGAB and GRB. So if the GRB profit is 260 and the total NCI profit is 300 then the BLAGAB profit is just 40.

So GRB has been taxed at 26% (except for the dividend adjustment).

On page 9 the NCI profit seems to include GRB profit and is compared with the total I - E + GRB, but no tax calculations are done so it doesn't necessarily contradict the above.

Yes, this is the same as the above. The NCI profit covers both GRB and BLAGAB profits.

On page 12 it says the amount of I-E equal to NCI profit not derived from dividends is taxed at 26% and the balance taxed at 20%, which implies all GRB is taxed at 20% (unless the statement doesn't include GRB at all).

You need to be careful here. It says in ActEd text "Remember that when the NCI test bites, I–E is altered so that it equals the NCI profit.", so the I-E referred to in the tax rules at this point is the greater of the total NCI profit and the GRB profits plus BLAGAB I-E.

So this piece of Core Reading is effectively saying that profits are taxed at 26% (including GRB profits). The remainder of the I-E (if there is any) is taxed at 20%.

However:

Question 2(ii) in the April 2010 paper -

I = 900, E = 700, NCI = 50, GRB case VI = 100

The solution gives total taxable income = I - E + GRB = 300

NCI profit = BLAGAB NCI + GRB = 150

Shareholder share = NCI so 150 taxed at 28%
Policyholder share = 300 - 150 = 150 taxed at 20%

So here all the GRB profits have been taxed at the corporation rate, not the policyholder rate.

What is correct?

So this question is consistent with the above. GRB has again been taxed at the corporation rate (which at the time was different). Note that the examiners have kindly ignored dividends.

I'm sorry that tax is so confusing. Sadly the HMRC rules are written in a very complex way as layer after layer of rule changes are added. The good news is that the rules are having a major re-write and so tax should be greatly simplified from January 2013 (see the section 6 on the implications for tax of Solvency II).

Best wishes

Mark

 

[claire3000006]

Thanks. Maybe I should just stop thinking about it too much.... but i don't understand how in question 7.1 the GRB profit (260) can be greater than the shareholder's unfranked income (250) if this includes the GRB amount...

 

[Mark Willder]

but i don't understand how in question 7.1 the GRB profit (260) can be greater than the shareholder's unfranked income (250) if this includes the GRB amount...

GRB profit includes dividends, but the unfranked income does not.

Hopefully the examiners will continue to use simpler examples than the ActEd notes.

Best wishes

Mark

 

[scarlets]

Glad I found this thread, thanks for bringing it up Claire.

I just had another one of those "oh I thought I knew this, but seems I don't" moments which tend to waste, I dunno, in some cases 1-2 hours+ of study time and unnecessary worry/confusion/anger, and that nasty surprise in a few days when you find another example or statement that doesn't tie in with something you learnt a few days ago.

I've experienced more of those frustrating moments with SA2 than any other subject as my questions on here show, so I do wonder why that is. Acted need to incorporate all the concerns on this forum to the notes for the September exams for any unlucky folks who have to resit it then. It's quite obvious that there are a lot of things not properly explained.

I'd seriously dispute the 'advice' at the start of SA2 about "Understanding, analysing and judging are more important than learning and recalling" as this subject has loads of bookwork to absorb.