Insurance: How will adopting IFRS 17 affect your tax position?

IFRS 17 will replace IFRS 4 on 1 January 2023 and establish new principles for entities to account for insurance contracts. For some insurers, the move to IFRS 17 will result in a material transitional adjustment as well as affecting their future accounting profits or losses: the potential tax impacts will need to be considered carefully and companies will also need to prepare for the potential disruption to their cashflow and earnings.

To help ease the adoption of IFRS 17, HMRC published a tax consultation in November 2021 asking questions regarding the tax and accounting impact of IFRS 17. The consultation also included the proposed repeal of section 79 for life assurance companies writing BLAGAB.

Transitional adjustments

The tax impact of adopting IFRS 17 could potentially be significant for insurers, particularly in relation to any transitional adjustment. The consultation recognised this and asked a number of questions around how the impact might be mitigated.  

In our response to the consultation we have made clear that we consider it would be appropriate to allow spreading of the transitional adjustment for general insurance entities over and above a certain threshold, to ensure that groups are not adversely affected by a significant one-off adjustment. We also called for the government to legislate for an election to apply spreading (or not) to be applied.

How many years any transitional adjustment is to be spread over has yet to be decided. The consultation calls for evidence on the size of potential adjustments to allow the government to decide on duration and it is expected that details will be published with draft legislation in summer 2022.

Of course, not all insurance businesses will adopt IFRS 17 immediately, those moving from UK GAAP to IAS in an accounting period beginning on or after 1 January 2024 will be late adopters. We have pointed out our view that late adopters should not be unfairly disadvantaged and that transitional spreading should be available to them whenever IFRS 17 is finally adopted.  

Further tax impacts

The consultation seeks to identify and address a range of further impacts on insurance businesses. In that regard, we have specifically commented on the following:

Mutuality - We expect that the principle of mutuality will remain, and the fact that some mutual insurance groups will need to adopt IFRS 17 should not change the fact that they are not subject to tax on underwriting profits (and continue to be taxed on investment income and chargeable gains less expenses).

Accounting mismatches – It is likely that there will be mismatches from an accounting perspective between the cedant and the reinsurer, as for example, the former could have a Premium Allocation Approach / Variable Fee Approach and the latter General Measurement Model. Generally, we would expect the taxation of the cedant and reinsurers to follow the accounts, so potential tax mismatches could arise.

Life assurance policyholders - We do not expect any significant impacts on policyholders, but if groups consider re-visiting their commercial allocation methodologies on the move to IFRS 17, this has the potential to affect the I – E computation and, therefore, policyholder tax. Such a change in the commercial allocation will need to be agreed with HMRC on a case-by-case basis.

Making Tax Digital - Although MTD will not apply until 2026, our response stresses that HMRC should engage with insurance groups to understand the impact of changes in accounting systems etc. under IFRS 17 and how they might report that information on a regular basis under MTD.

OECD Pillar 2 - We would note that the interaction with the minimum tax rate rules under the OECD Pillar 2 initiative should be considered. For example, any transitional adjustments that are spread will give rise to deferred tax liabilities, the impact of which under the model rules should be assessed.