Finance Bill (HL Bill 71)

Step 3 - trade profits and non-trade profits

Divide the company’s total profits for the accounting period (as
15modified under step 1(2)) into—

(a) profits of a trade of the company (the company’s “trade
profits”), and

(b) profits that are not profits of a trade of the company (the
company’s “non-trade profits”).

20Step 4 - apportioning the step 2 amount

Take the step 2 amount and do one of the following—

(a) reduce the company’s trade profits by the whole of that
amount,

(b) reduce the company’s non-trade profits by the whole of that
25amount, or

(c) reduce the company’s trade profits by part of that amount
and reduce the company’s non-trade profits by the
remaining part of that amount.

Apply this step in a way which ensures that neither the company’s
30trade profits nor the company’s non-trade profits are reduced below
nil.

Step 5 - amount of qualifying trading or non-trading profits (if not
determined under step 1 or 2)

The amounts resulting from step 3, after any reduction under step 4,
35are—

(a) in the case of the amount in step 3(a), the company’s
qualifying trading profits, and

(b) in the case of the amount in step 3(b), the company’s
qualifying non-trading profits.

(4) 40For the purposes of subsection (3) the company’s total profits for an
accounting period are to be calculated with the following
modifications—

(a) ignore any income so far as it falls within, and is dealt with
under, Part 9A of CTA 2009 (company distributions);

(b) 45ignore any ring fence profits (as defined in section 276);

(c) ignore any contractor’s ring fence profits (as defined in
section 356LD);

(d) if the company is an insurance company, ignore any I-E profit
(see section 141(2) of FA 2012);

(e) 50make no deductions under sections 45(4)(b) and 45B (carry
forward of trade loss against subsequent trade profits) other

than deductions that would be ignored for the purposes of
section 269ZB by reason of—

(i) section 1209(3), 1210(5A) or 1211(7A) of CTA 2009
(losses of film trade),

(ii) 5section 1216DA(3), 1216DB(5A) or 1216DC(7A) of
that Act (losses of television programme trade),

(iii) section 1217DA(3), 1217DB(5A) or 1217DC(7A) of
that Act (losses of video game trade),

(iv) section 1217MA(3) or 1217MC(9) of that Act (losses of
10theatrical trade),

(v) section 1217SA(3) or 1217SC(9) of that Act (losses of
orchestral trade),

(vi) section 1218ZDA(3) or 1218ZDC(9) of that Act (losses
of museum or gallery exhibition trade),

(vii) 15section 65(4B) or 67A(5A) (losses of UK or EEA
furnished holiday lettings business),

(viii) section 269ZJ(1) (insurance companies: shock losses),

(ix)(ix) section 304(7) (certain losses of ring fence trades), or

(x) section 356NJ(2) (pre-1 April 2017 loss arising from oil
20contractor activities);

(f) make no restricted deductions (as defined in section
269ZB(4)) under section 303B(4) or 303D(5)); and

(g) make no deductions under section 457(3) or 463H(5) of CTA
2009 (carry forward of non-trading deficits from loan
25relationships against subsequent non-trading profits), other
than deductions that would be ignored for the purposes of
section 269ZC by reason of section 269ZJ(2) (insurance
companies: shock losses).

(5) The following are “excluded deductions” for an accounting period
30(“the current accounting period”)—

(a) a deduction for the current accounting period which is a
relevant deduction for the purposes of section 269ZD (see
subsection (3) of that section);

(b) a deduction under section 37 (relief for trade losses against
35total profits) in relation to a loss made in an accounting
period after the current accounting period;

(c) a deduction under section 45F (terminal losses);

(d) a deduction under section 260(3) of CAA 2001 (special leasing
of plant or machinery: carry back of excess allowances) in
40relation to capital allowances for an accounting period after
the current accounting period; and

(e) a deduction under section 463E of CTA 2009 (non-trading
deficit from loan relationships) in relation to a deficit for a
period after the current accounting period.

45Exclusion for certain general insurance companies

269ZG General insurance companies: excluded accounting periods

(1) Nothing in sections 269ZB to 269ZE has effect for determining the
taxable total profits of a general insurance company for an excluded
accounting period.

(2) An accounting period of a general insurance company is an
“excluded accounting period” if conditions A and B are met.

(3) Condition A is that—

(a) the company is subject to insolvency procedures (see section
5269ZH) at the end of the accounting period,

(b) immediately before it became subject to insolvency
procedures the company—

(i) was unable to pay its debts as they fell due, and

(ii) met the non-viability condition, and

(c) 10the company’s liabilities in respect of qualifying latent claims
(see section 269ZI) were the main factor contributing to the
company’s meeting the non-viability condition at that time.

(4) Condition B is that—

(a) at the end of the accounting period the company meets the
15non-viability condition, and

(b) the company’s liabilities in respect of qualifying latent claims
are the main factor contributing to the company’s meeting
that condition at that time.

(5) At any time, a general insurance company meets the non-viability
20condition if there is no realistic prospect that it will subsequently
write any new insurance business.

(6) For the purposes of this section a person who carries on the activity
of effecting or carrying out contracts of general insurance is a
“general insurance company” if—

(a) 25the person has permission under Part 4A of the Financial
Services and Markets Act 2000 to carry on that activity,

(b) the person is of the kind mentioned in paragraph 5(d) or (da)
of Schedule 3 to the Financial Services and Markets Act 2000
(EEA passport rights) and carries on that activity in the
30United Kingdom through a permanent establishment there,
or

(c) the person qualifies for authorisation under Schedule 4 to the
Financial Services and Markets Act 2000 (Treaty rights) and
carries on that activity in the United Kingdom through a
35permanent establishment there.

(7) The definition in subsection (6) is subject to the following
qualifications—

(a) a friendly society within the meaning of Part 3 of FA 2012 is
not a general insurance company, and

(b) 40an insurance special purpose vehicle (as defined in section
139 of FA 2012) is not a general insurance company.

(8) In this section—

• “contract of general insurance” means a contract of a type
  described in Part 1 of Schedule 1 to the Financial Services and
  45Markets Act 2000 (Regulated Activities) Order 2001
  (S.I. 2001/544);

• “liability” includes a contingent or prospective liability.

269ZH “Insolvency procedures”

(1) For the purposes of section 269ZG a company is subject to insolvency
procedures if—

(a) it is in liquidation,

(b) 5it is in administration,

(c) it is in receivership, or

(d) a relevant scheme has effect in relation to it.

(2) A company is “in liquidation” for the purposes of this section if—

(a) it is in liquidation within the meaning of section 247 of the
10Insolvency Act 1986 or Part 3 of the Insolvency (Northern
Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19), or

(b) a corresponding situation under the law of a country or
territory outside the United Kingdom exists in relation to the
company.

(3) 15A company is “in administration” for the purposes of this section if—

(a) it is in administration within the meaning of Schedule B1 to
the Insolvency Act 1986 or Schedule B1 to the Insolvency
(Northern Ireland) Order 1989, or

(b) there is in force in relation to it under the law of a country or
20territory outside the United Kingdom any appointment
corresponding to the appointment of an administrator under
either of those Schedules.

(4) A company is “in receivership” for the purposes of this section if
there is in force in relation to it—

(a) 25an order for the appointment of an administrative receiver, a
receiver and manager or a receiver under Chapter 1 or 2 of
Part 3 of the Insolvency Act 1986 or Part 4 of the Insolvency
(Northern Ireland Order) 1989, or

(b) any corresponding order under the law of a country or
30territory outside the United Kingdom.

(5) In this section “relevant scheme” means a compromise or
arrangement—

(a) under section 425 of the Companies Act 1985, Article 418 of
the Companies (Northern Ireland) Order 1986 (S.I. 1986/
351032 (N.I. 6)) or Part 26 of the Companies Act 2006, or

(b) under any corresponding provision of the law of a country or
territory outside the United Kingdom.

269ZI “Qualifying latent claims”

(1) This section applies for the purposes of section 269ZG.

(2) 40Where a general insurance company has a liability in respect of a
claim, the claim is a “qualifying latent claim” if conditions A to C are
met.

(3) In this section “claim” means a claim (whether actual or potential)
under an insurance policy.

(4) 45Condition A is that—

(a) the claim is of a type that was not reasonably foreseeable at
the time when the insurance policy concerned was entered
into, and

(b) it is likely that, had the company foreseen that type of claim,
5the price or other terms of the policy would have been
significantly different.

(5) Condition B is that the latency period associated with that type of
claim (see subsection (7)) is more than 10 years.

(6) Condition C is that the insurance policy, or the part of the insurance
10policy under which the claim is or would be made, is—

(a) an employer’s liability policy, or

(b) a public or products liability policy.

(7) The “latency period” associated with a type of claim is the mean
period for claims of the type between—

(a) 15the insured event giving rise to the claim, and

(b) notification of the claim.

(8) The mean period mentioned in subsection (7) is to be determined as
at the end of the accounting period mentioned in section 269ZG(2).

(9) In this section—

• 20“employer’s liability policy” means an insurance policy against
  the risks of the person insured incurring liabilities to the
  insured’s employees for injury, illness or death arising out of
  their employment during the course of business;

• “general insurance company” is to be interpreted in accordance
  25with section 269ZG;

• “insurance policy” includes any contract of insurance;

• “liability” includes a contingent or prospective liability;

• “public or products liability policy” means an insurance policy
  against the risks of the person insured incurring liabilities to
  30third parties for damage to property, injury, illness or death,
  arising in the course of the insured’s business.

269ZJ Exclusion of shock losses from restrictions

(1) If a shock loss is—

(a) carried forward to an accounting period of an insurance
35company (see section 269ZP(2)), and

(b) deducted under section 45B (post-1 April 2017 trade losses
carried forward against trade profits),

the deduction is to be treated as not falling within section 269ZB(3).

(2) If a shock loss is—

(a) 40carried forward to an accounting period of an insurance
company, and

(b) deducted under section 463H of CTA 2009 (carry forward of
unrelieved non-trading deficit from loan relationships
against non-trading profits),

45the company is to be treated for the purposes of sections 269ZC and
269ZD(2)(b)(ii) as not having made that deduction.

(3) If an insurance company makes a deduction of (or in respect of) a
shock loss, that deduction is not a “relevant deduction” for the
purposes of section 269ZD (restriction on deductions from total
profits).

(4) 5See also section 124E of FA 2012 (exclusion from the restriction on
deductions from BLAGAB trade profits).

269ZK Meaning of “shock loss”: requirement to make a claim

(1) If the conditions in subsection (3) are met, an insurance company
may make a claim in respect of—

(a) 10a loss or other amount (the “specified loss”), and

(b) a period of 12 months (“the specified period”) which is a
solvency shock period (see section 269ZM).

(2) A claim may specify more than one 12 month period under
subsection (1)(b) (but periods specified by an insurance company
15under this section may not overlap with one another).

(3) The conditions are that—

(a) the accounting period (for corporation tax purposes) in
which the specified loss arises (“the loss-making period”)
begins on or after 1 April 2017,

(b) 20the specified loss is, or is capable of being, carried forward to
a subsequent accounting period, and

(c) the loss-making period and the specified period have one or
more days in common.

(4) A claim under this section must be made within—

(a) 25the period of two years after the end of the loss-making
period, or

(b) such further period as an officer of Revenue and Customs
allows.

(5) If—

(a) 30a claim is made under this section, and

(b) the whole of the loss-making period is, or falls within, the
specified period,

the specified loss is a “shock loss”.

(6) If—

(a) 35a claim is made under this section, and

(b) the loss-making period falls partly, but not wholly, in the
specified period,

the specified loss is a “shock loss” so far as it is attributable to the
specified period.

(7) 40For the purposes of subsection (6) the specified loss is “attributable
to” the specified period in the proportion—

Where P is the number of days of the loss-making period that fall
within the specified period and N is the number of days in the loss-
making period.

(8) If the method in subsection (7) would produce a result that is unjust
5or unreasonable, the apportionment of the specified loss for the
purposes of subsection (6) is to be made on a just and reasonable
basis.

269ZL Further provision about claims under section 269ZK

(1) A claim under section 269ZK is not effective unless—

(a) 10the claim—

(i) states the company’s solvency capital requirement at
the beginning of the specified period,

(ii) states the company’s shock loss threshold for that
period, and sets out the calculation of that amount (as
15described in steps 2 to 5 of 269ZN(1)), and

(iii) states the amount of the company’s solvency loss for
that period (see section 269ZO), and

(b) the company submits with the claim—

(i) information (“the submitted information”)
20corresponding to the information specified in the
template mentioned in point (i), (j) or (k) (as the case
requires) of Article 4 of the technical standards
implementing Regulation, and

(ii) a report provided by the appropriate person which
25meets the condition in subsection (2).

(2) The condition is that the report includes an opinion confirming
that—

(a) the submitted information is prepared in all material respects
in accordance with any relevant requirements which would
30apply if the submitted information were disclosed as part of
the company’s report on solvency and financial condition,

(b) the calculation of the company’s shock loss threshold (not
including step 1(a) of section 269ZN(1)) complies in all
material respects with section 269ZN, and

(c) 35the company’s solvency loss is calculated in all material
respects in accordance with section 269ZO.

(3) In this section “relevant requirements” means—

(a) requirements under rules made by the Prudential Regulation
Authority, and

(b) 40requirements under any directly applicable EU regulation
made under the Solvency 2 Directive.

(4) In this section “the appropriate person” means—

(a) the company’s chief actuary, or

(b) (if the company is not a PRA-authorised person) a person
45with equivalent functions.

(5) Subsections (1)(b)(i), (2)(a) and (3) have effect in relation to a third-
country insurance undertaking as if it were an insurance
undertaking.

269ZM Meaning of “solvency shock period”

A period of 12 months is a “solvency shock period” in relation to an
insurance company if the company has a solvency loss for that
period (see section 269ZO) which exceeds the company’s shock loss
5threshold for that period (see section 269ZN).

269ZN Determination of shock loss threshold

(1) A company’s shock loss threshold for a 12 month period is
determined as follows.

Step 1

Step 2

Calculate the deductible amount (see subsection (2)) for each
relevant ring-fenced fund of the company.

20Step 3

Deduct the total of the amounts found under step 2 from the
company’s adjusted SCR.

Step 4

Multiply the amount found under step 3 by 90%.

25Step 5

The result is the company’s shock loss threshold for the period.

(2) The deductible amount for a relevant ring-fenced fund is the lesser
of A and B, where—

(a) A is the amount of basic own funds within that fund at the
30beginning of the period (or zero, if greater);

(b) B is the notional solvency capital requirement for that fund at
the beginning of that period.

(3) But in calculating amount A for the purposes of subsection (2)—

(a) no account is to be taken of the value of future transfers
35attributable to shareholders;

(b) a restricted own-fund item within the fund is to be
disregarded if the company’s with-profits actuary provides a
written opinion confirming that the condition in subsection
(4) is met.

(4) 40The condition is that—

(a) the item is available as a restricted own-fund item pursuant
to conditional support arrangements, and

(b) if at the time mentioned in subsection (2)(a) or any
subsequent time (when the conditional support
45arrangements are in place) the value of the company’s
interest in the item were to be (or is in fact) greater than zero,
that value would be recognised for the purposes of a balance

sheet drawn up at the time in question by the company in
accordance with generally accepted accounting practice.

(5) In this section “conditional support arrangements” means
arrangements under which the relevant restrictions would cease to
5apply if specified conditions relating to the financial strength of the
fund were met.

(6) In subsection (5) “the relevant restrictions” means the restrictions on
transferability as a result of which the item is a restricted own-fund
item.

(7) 10In this section “adjustment for the loss-absorbing capacity of
deferred taxes” means—

(a) an adjustment pursuant to Article 103(c) of the Solvency 2
Directive, or

(b) any corresponding adjustment made pursuant to Subsection
153 of Section 4 of Chapter 6 of Title 1 of the Solvency 2
Directive (solvency capital requirement full and partial
internal models).

(8) Where the company is a third-country insurance undertaking—

(a) steps 1(b) and 2 to 5 of subsection (1), and

(b) 20subsections (2) to (7),

have effect with any modifications that are appropriate as a result of
the reference in step 1(a) of subsection (1) to the “solvency capital
requirement” having effect in accordance with section 269ZP(1)(b).

269ZO Calculation of solvency loss

(1) 25An insurance company’s solvency loss (if any) for a 12 month period
is determined as follows.

(2) Calculate, in the manner set out in subsections (5) to (11)—

(a) whether the total amount of the company’s basic own funds
at the beginning of the period (“opening BOF”) exceeds the
30total amount of the company’s basic own funds at the end of
the period (“closing BOF”), and

(b) if so, the amount by which opening BOF exceeds closing BOF.

(3) The company has a solvency loss for the 12 month period only if an
excess of opening BOF over closing BOF is found under subsection
35(2)(a).

(4) The amount found under subsection (2)(b) is the amount of the
solvency loss.

(5) The method of calculation under subsection (2) must fairly represent
the method by which the company calculates its solvency capital
40requirement.

But this is subject to subsections (6) to (10).

(6) Closing BOF is to be calculated on the assumption that the 12 month
period mentioned in subsection (1) is a solvency shock period in
relation to the company.

(7) 45The following adjustments are to be made in calculating the
company’s basic own funds at the beginning and end of the period—

• 1. Find (with respect to each of those times) what that amount
  would be in the absence of this subsection.

• 2. Find the surplus in respect of each relevant ring-fenced
  fund of the company (at the time in question).

• 53. Deduct the total of the amounts found under paragraph 2
  from the amount found under paragraph 1.

The result is to be taken to be the amount of the company’s basic own
funds at the beginning, or (as the case may be) the end, of the period.

(8) The surplus in respect of a relevant ring-fenced fund (at any time) is
10equal to—

(a) the amount of basic own funds attributable to policyholders,
or

(b) zero, if greater.

(9) For any relevant ring-fenced fund, the amount of basic own funds
15attributable to policyholders (at any time) is equal to—

where—

A is the amount of basic own funds within the relevant ring-fenced
fund;

20B is the total of any items in the fund that fall within subsection (10).

(10) The items are—

(a) the value of future transfers attributable to shareholders;

(b) any restricted own-fund item in relation to which the
company’s with-profits actuary provides a written opinion
25confirming that the condition in subsection (4) of section
269ZN is met.

(11) In subsection (5) the reference to the “method” of a calculation is to
the—

(a) taking into account, and

(b) 30leaving out of account,

of variations in items of basic own funds for the purposes of the
calculation.

(12) If the company is a third-country insurance undertaking, subsections
(1) to (11) have effect in relation to it as if it were an insurance
35undertaking.

269ZP Interpretation of sections 269ZJ to 269ZO

(1) In sections 269ZJ to 269ZO “solvency capital requirement”—

(a) in relation to an insurance undertaking or a reinsurance
undertaking, means the solvency capital requirement
40pursuant to Section 4 of Chapter 6 of Title 1 of the Solvency 2
Directive;

(b) in relation to a third-country insurance undertaking, means
the amount that would be the undertaking’s solvency capital