UK-based captive owners should be prepared to face increased tax authority scrutiny over the coming years, according to a note by Deloitte.
Captives are particularly likely to attract increased attention from tax authorities if they use outsourced operating models and have low headcounts, or are supported by onshore risk management functions, it warned.
Deloitte said prospective captive owners should consider their tax position before launching a captive, and keep the situation under review.
The consultancy noted that captives can deliver commercial benefits to their owners, which have only been highlighted by the COVID-19 pandemic. “Some captives are paying out claims on risks groups are exposed to such as contingency risks, given third party insurance policies could exclude claims which relate to pandemics such as COVID-19,” it said.
However, it stressed that under the OECD 2020 transfer pricing guidance, captive insurance arrangements must be accurately delineated as actual insurance in order to be priced as insurance, or premiums may be disallowed.
To be considered accurately delineated, captive staff must have the expertise to make decisions independently. Transfer pricing methods must adhere to OECD guidance, and captive arrangements must be “commercially rational”.
Deloitte also urged captive owners to consider the insurance premium tax (IPT) position of its arrangements. “Location of risk and IPT has been placed under HM Revenue and Customs scrutiny in recent years,” it warned. “Is offshore risk correctly identified as such for IPT accounting purposes?”
Deloitte, HM Revenue and Customs, OECD, Transfer pricing, Insurance premium tax