Commentary

D7.5106 Mutual surplus

Corporate tax
Corporate tax | Commentary

D7.5106 Mutual surplus

Corporate tax | Commentary

D7.5106 Mutual surplus

The rules in this division apply for accounting periods beginning before 1 January 2013. For accounting periods beginning on or after 1 January 2013 see Division D7.4.

Historically, a mutual company could declare a surplus in excess of that needed to pay bonuses to policy holders safe in the knowledge that the surplus would not be taxed but would be carried forward for distribution to policy holders in future periods of account. If the mutual company subsequently demutualised, the unappropriated surplus would be available to its proprietary successor to distribute to shareholders but because that surplus was declared when the company was mutual it would not have entered into the calculation of profits under the life assurance trade profit provisions. Given the number of demutualisations that have occurred in recent years, HMRC were concerned about possible tax leakage by this method. To counter this, the government introduced legislation in FA 20061 to take effect for periods of account ending on or after 29 September 20052 (the date on which it announced its intention to legislate) although the rules can apply as a result of events occurring before that date. The new legislation addresses future demutualisations by taxing any unappropriated surplus at the date of the demutualisation and past demutualisations by taxing a pre-demutualisation unappropriated surplus when it is released to shareholders. In practice the legislation is likely to affect only a very small number of companies.

The legislation, which is relatively simple in concept but detailed in definition,

To continue reading
View the latest version of this document, as well as thousands of others like it, sign in to TolleyLibrary or register for a free trial