Informal Consultation on Transitional Regulations

I have had a quick read through of HMRC's informal consultation on the transitional regulations.  See Friday's round up for a link to the document.

The "problem" seems to be with the treatment of DAC and was initially raised by Lindsay J' Afari - Pak at Cobham, although HMRC are saying that similar issues can arise on transitional items other than DAC and in a wider range of circumstances.

An example of the issue is where there is an inter-group part vii.  The transferor transfers DAC that is then written off in the transferee.  So say  the transferor transfers assets of £100, liabilities of £100 and pre December 2012 DAC of 10.  It shows an accounting loss of £10.  In the transferee as the DAC is not recognized then the accounting position is 0 (100 of assets and 100 of liabilities).  Generally the rule on an intergroup part vii is that you exclude accounting entries in both the transferor and transferee but if there is a difference in the accounting treatments then you adjust.  So in this instance as there is a loss of £10 in the transferor  but a 0 result in the transferee there is an additional deduction of £10 recognized in the profits computations of the transferee. But that deduction is effectively for pre 2012 DAC so its already been relieved once in the LATP comp of the transferor and there is a double deduction for the DAC.

Additionally HMRC believe there is a also problem where the transferee does recognize a DAC asset after a transfer of business.  The point here is that it seems as if the DAC is treated as post 2012 (as its being set up in a new company) and accordingly a tax deduction will be available when the DAC is written off to the income statement, again allowing double deduction.

The informal consultation includes two suggested wordings that deal with these problems.  I don't have any views on the suggested changes but I do wonder if the problem here is really that DAC should not have been treated as an excluded item.  That is if the rules calculated the difference between expenses relieved in the tax computation but not included as expenses in the GAAP accounts at 31.12.2012 and then included this amount in the transitional calculation  wouldn't everything then work as it should ?  I think it was HMRC that didn't want DAC to be a transitional item.