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Lloyd&#39s has won a tax victory against the Inland Revenue before the General Commissioners. It confirmed that the Reinsurance To Close (RITC) premium deduction for tax purposes should not be discounted because of the time lag between payment of the RITC and the likely maturity of the liabilities.



This was a test case taken on by Wellington Underwriting Non-Marine Syndicate 1095 on behalf of all the individual and corporate members of the Lloyd&#39s market. The total tax stake for 1994 and all later years was approximately £350 million. Lloyd&#39s members who have already paid their tax will be entitled to a repayment.



The Finance Act 1994 changed the basis of assessment from the &#34arising basis&#34 (where the profits and losses of an underwriting account were related to the tax year in which that underwriting account ended) to a &#34declared or distribution basis&#34 (where they are related to the tax year in which profits or losses are declared). This change applies for the 1994 and subsequent underwriting accounts. This was necessary for self-assessment to operate.



The Inland Revenue could appeal to the High Court as the legislation does not explicitly or implicitly require discounting but neither does it prohibit it. Lloyd&#39s is worried that the Inland Revenue&#39s treatment would lead to an uncommercial figure being used for tax purposes.



From a commercial viewpoint Lloyd&#39s is one of the leading reinsurance markets in the world and any increases in taxation could cause a weakening of its competitive position.



The legislation is contained in section 177 Finance Act 1993. The deduction for tax purposes should be &#34only to the extent that it is shown not to exceed a fair and reasonable assessment of the value of the liabilities in respect of which it is payable&#34 and that the assessment must &#34be arrived at with a view to producing the result that a profit does not accrue to the member to whom the premium is payable but that he does not suffer a loss&#34. This treatment does not apply to insurance companies outside Lloyd&#39s as these have non-discounted reserves rather than having to pay RITC premiums. Lloyd&#39s syndicates need to pay RITC to enable them to close their books (which run for a three year accounting period) and declare the profits (or losses) for that year.


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