Finance Bill

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The Chairman: Order. I have selected amendment No. 151 for debate on its own, later on.

Mr. Flight: I am sorry, I thought that they were all grouped together.

I cannot believe it, but I seem to have ploughed through my several points. I trust that the Economic Secretary will be aware of most of them, as I know that there have been representations to the Revenue, and just the other day there was a major industry conference in which the Revenue participated. I know that the industry does not want the Treasury to think that it does not acknowledge some of the favourable aspects of the reforms; but the industry, its advisers and I feel that the points that we have referred to are on provisions that do not do anything helpful and the issues that they deal with could be better addressed.

I have spoken to all the amendments in the group. As I commented earlier, we will want to press amendments Nos. 133 and 134 to a vote later, in whatever constitutional way we may, if the Government do not agree to accommodate them in some way.

Mr. Djanogly: There are many problems with the schedule, and we have received an enormous number of representations on it. The Opposition amendments show that we believe that many changes need to be made, and the number of Government amendments to the schedule makes it clear that we are not the only ones who think that it is not yet right.

The schedule closes loopholes, but it potentially creates taxes for many more people. It is worth reiterating the point that my hon. Friend the Member for Arundel and South Downs made: the Bill contains many pages of legislation, but we are not entirely clear how great an effect for the good they will have.

These provisions are extremely complicated. Although I shall speak to the amendments, I am sure that everyone will be pleased to hear that I shall switch to plan B and distil my remarks down to five key points and questions. First, paragraph 2 seems to be retrospective in effect. It relates to cases in which other income arises or a transfer is made from a long-term fund, pursuant to a pre-existing obligation before 23 December 2002 or an obligation entered into after that date under a transaction carried out for the purposes of a contract or transfer scheme made or sanctioned by the court before that time. What is the Minister's view on that?

Secondly, it does not seem appropriate that, under paragraph 2, amounts that would not be taxed under normal trading principles will potentially be taxed for a life assurer through group relief receipts, capital contributions from other companies and other capital receipts. Thirdly, the schedule could cause an acceleration of tax for innocent commercial loans.

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With regard to contingent loans, the deduction given in new section 83ZA has a limit clearly calculated by reference to normal transfers to shareholders based on a 90:10 ration fund. However, as the Law Society has pointed out, under this proposal, when a non-profit company has a surplus and a transfer to shareholders is funded from that surplus, the end result is unreasonable.

My fourth point is another Law Society point and relates to anti-avoidance. The main purpose of the schedule is to require that additions to the long-term fund of a life assurance company be treated as taxable to ascertain whether the company has made a loss in a computation prepared on case I principles. For the anti-avoidance provision to apply, the addition needs to have been made as part of or in connection with a transfer of business, but even under current law the provision is widely drafted and capable of disallowing losses unconnected with the addition.

Finally, the widening of the definition in sub-paragraphs (6) and (9) of paragraph 2 of transfer of business, which already includes most reinsurance, but not reinsurance with a pure reinsurer or reinsurance of a new business, is not welcome, and many people have responded on the schedule. The scope of section 83(3) of the Finance Act 1989 is believed by many to be too wide, so amendments to sub-paragraphs (6) and (9) have come as a surprise, particularly as they were not mentioned in the 23 December press release.

John Healey: We are considering a significant schedule and a large number of amendments, on which some serious arguments have been made, particularly by the hon. Member for Arundel and South Downs. However, I shall start with one argument that is not so serious.

The idea that the combined effect of clause 169 and the schedule puts life companies at a disadvantage is wrong, as is the idea that it is a set of stealth taxes that increases the life assurance industry's overall tax burden. The combined impact of the clause and the schedule will reduce the overall amount of tax payable by insurers by an estimated £40 million a year by 2004.

Those measures will not raise the general level of tax payable by insurers, but will prevent a small number of companies from exploiting their circumstances to pay much less tax than other companies writing similar business. The changes will therefore protect the tax base and ensure a fairer distribution of tax across the industry.

The hon. Gentleman paid tribute to the right hon. Member for Fylde, who I am sad to see is not in his place. Each year for a number of years the right hon. Gentleman has tabled a new clause to the Finance Bill and has argued for a reduction in the rate of tax on the capital gains that a life assurance company pays on behalf of its policyholders. He, like the industry, will welcome the fact that the Government have accepted his proposal this year­in paragraph 12 of schedule 33­and are reducing the rate from 22 per cent. to 20 per cent. The right hon. Gentleman did not realise when he made his speech in the Chamber on Second

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Reading that we had made that change. I am glad that he can be in no doubt of it now. Our view was that it is right to make the change now as part of the package of changes that the clause and schedule introduce.

The hon. Member for Arundel and South Downs also referred to an assessment of impact. He will know that no regulatory impact assessment is required for anti-avoidance measures. Nevertheless, Revenue officials have worked hard with the industry, and especially the Association of British Insurers, to modify the original proposals to meet the industry's concerns about compliance costs. That is particularly the case with the bed-and-breakfasting measures that the hon. Gentleman mentioned, where we have changed the approach to reflect a suggestion from the ABI and have excluded losses between 23 and 31 December totalling less than £10 million per company. An exclusion for interfund transfers to match assets with limited liabilities has also been introduced as a result of those discussions.

The hon. Gentleman and the hon. Member for Huntingdon raised the spectre of retrospection. It is standard practice for anti-avoidance rules to be announced in the news release with the intention that the legislation will apply from the date of the news release. I see that the hon. Member for Arundel and South Downs is nodding his head, so he accepts that point. Experience showed that the tackling of avoidance often took place at the end of the calendar year. The legislation announced on 23 December was designed to tackle that, and was made public as soon as possible. Parliament now, quite properly, has a chance to debate the legislation. Let me be clear on the matter: there is nothing retrospective about the changes. The only effect is on the computation of profits for periods after the date of the announcement. The changes may affect future profits arising from past transactions, but there is nothing unusual in that.

10.15 pm

I shall deal with the accusation that the measure is somehow double taxation. I refute that; no profits are being taxed twice. However, compensation paid to former members of mutuals was in principle liable to capital gains tax, but in practice little tax would have been paid. The argument that the hon. Member for Arundel and South Downs appears to be making is that when a business is sold, the price paid for the business should be deducted from future profits. That does not happen to other businesses, and there is no reason why it should happen in this case.

The real issue is not double taxation of profits, which will not happen, but the creation of wholly spurious losses, despite the fact that mutuals could never have had losses. There is no justification for creating tax losses when there are profits in both the regulatory and Companies Act accounts. That would be wholly unjustifiable and a raid on the Exchequer.

I shall now deal with the amendments, and will briefly touch on the most significant of the Government amendments. In introducing clause 169, I emphasised the process that we have conducted in preparing the measures set out in the clause and the schedule. As a result of the consultation, schedule 33

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reflects a large number of the changes, most of which have been welcomed by the industry. It also contains one or two extra measures to stop further avoidance schemes that had come to light. It contains, to the universal approval of the industry, that long-sought reduction in the corporation tax rate for all life assurance companies. The measures are not wholesale increases in the tax charge imposed without warning on an unsuspecting industry, but have been refined through an open, consultative process to reduce the compliance burden on companies while maintaining their effectiveness in ending avoidance.

All the amendments we are considering in this large group concern how the trading or case I profits of life insurance companies are calculated, which is why both Government and Opposition amendments have been taken together. The hon. Gentleman described the Opposition amendments as mainly probing amendments. I shall attempt to explain why we are encouraging him to withdraw the amendment. If he will not, I shall ask my hon. Friends to reject it. The hon. Gentleman stressed the importance of amendments Nos. 133 and 134. They are important and they are different from the other amendments. They concern something that is not in the schedule, because they deal with life assurance companies that have demutalised.

Amendment No. 133 is consequential to amendment No. 134, so I shall deal with the latter. It would remove from the trading profits of the demutalised business unrecognised market value increases that took place while the business was owned by a mutual insurer. Before the Budget we received strong representations from two companies running previously mutual businesses, which asked for such a measure. Their representations were carefully considered by Ministers. All the possible options were considered, but we decided we could not, and would not, give the companies what they were asking for. There is an important dispute over what they are asking for.

The companies think—the hon. Member for Arundel and South Downs confirmed that their counsel offers this advice to them—that the current law allows them to leave out of account for tax hundreds of millions of pounds of profit, which means that they may end up with massive tax losses that are not reflected in the accounts. They think that the schedule changes the law to stop that. The Inland Revenue, backed by counsel's advice, takes the view that what the companies want to do is not allowed under current law. The schedule puts that beyond doubt for the future. Our judgment is that it is better to do that than to leave the matter entirely to litigation, which can never be certain. There may be litigation for the past, but the position should be clear for the future. Unlike those advocating the amendments, the Government believe that the current law is the right approach.

The amendment could allow hundreds of millions of pounds of losses to arise for tax purposes, even when the company's regulatory return and statutory accounts showed a surplus. Apart from the obvious

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problem of a provision with that effect, it is significant that a trading loss for tax purposes cannot arise in a mutual company. The supporters of the amendment are saying that, as the business could not have made a trading profit if it had remained a mutual company, it should be allowed to generate a loss, which could never have happened in a mutual company. The hon. Member for Arundel and South Downs wants to have the cake and eat in a big way.

It will be clear from what I have said that we believe that the law should be what our legal advice says it is and what schedule 33 makes certain it will be when the Bill becomes law.

Under amendment No. 137, which, as the hon. Gentleman said, was proposed by the Law Society, all items shown as ''other expenditure'' in the revenue account and the FSA return of a life assurance company must be deducted whatever their nature. Some argue that that is only fair because the changes to section 83(2) of the Finance Act 1989 and the Bill bring in all receipts in that revenue account as income. The answer is twofold. First, changes to section 83 are intended to put beyond doubt what is already the case for most items of income. Secondly and more importantly, there are clear exceptions in the schedule to the rule that income shown in the return is also income for tax purposes. There are three exclusions: one for notional income, another for other amounts which represent previously taxed amounts and a third for amounts that are exempt from tax. There are no such exclusions in the amendment.

Amendments Nos. 138 and 139 refer to changes in the Bill that will have effect from 9 April—Budget day. There may be a misunderstanding. In amendment No. 138, the complaint is that pure reinsurers will be unable to take on business because their losses will be restricted. The section concerned applies only to a limited class of reinsurers and not when a reinsurer takes on only the morality risk in a policy. That is what pure life reinsurers mostly do. There is concern about the London reinsurance market, but in our judgment there should be none. In the UK, life reinsurance is a niche market with very few big players. The schedule will have no effect on commercial reinsurance arrangements. It is aimed at transfers of business dressed up as reinsurance.

Amendment No. 139 may also be based on a misunderstanding. Some companies have realised that they can generate artificial losses by creating a new company to reinsure a stream of new business in the old company. It surrenders those losses as group relief but, although it is a new company, it is not a start-up company. The previous Government was concerned about protecting start-up companies when they put the rules in place in 1996.

I shall next deal with amendments Nos. 142 to 144. In many ways, only amendment No. 144 is substantive, but it suffers from difficulties that are similar to those of amendment No. 134. It makes assumptions about existing law that are not necessarily correct. If the Inland Revenue is right about existing law, the amendment achieves nothing. However, the real thrust of the amendment is to remove what the Law Society considers the retrospective nature of the

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changes. I have explained that there is nothing retrospective about them. They were announced on 23 December 2002, before the legislation took effect.

Amendment No. 145 is also aimed at much the same point, but it would remove not only items that arise from a transfer of business, but all of them. It assumes that section 83(2), as amended by paragraph 2 of the schedule, changes the law fundamentally, but that is not right. Therefore, amendment No. 145 is also based on a mistaken premise.

Amendment No. 149 would delete the whole of the new rules about contingent loans. Following extensive consultation, the draft rules on contingent loans were changed so that they will not affect loans made to insurers for solvency purposes but will stop insurers using contingent loans to avoid tax.

The hon. Member for Arundel and South Downs argued that companies should be able to use such loans to make shareholder distributions without, I believe, a tax charge. It remains a key feature of the rules for computing case I profits of life companies that a company has considerable control over the emergence of profits. It can defer the recognition of gains and so defer the emergence of profits, in which case the deferral is followed for tax purposes. However, a company can also accelerate the emergence of profits—the use of contingent loans is one way of doing just that—thereby allowing shareholders to receive the profits earlier than would otherwise have been possible. The new rules are designed to ensure that the accelerated extraction of profits is also followed for tax purposes. To allow contingent loans to be used to fund shareholder transfers would completely undermine the objective of the legislation.

I am aware that not everyone in the industry is convinced that only abusive uses of contingent loans will be caught. I suggest to the industry, through the hon. Gentleman, that those who believe that to be the case and believe that they have arguments to support their position should come up with specific, hard examples to demonstrate it. I encourage them to contact Revenue officials, because if Ministers are required to consider the matter further, we will do so.

Amendment No. 150 is another wrecking amendment.

 
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