Finance Bill

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The Chairman: I hope that the Economic Secretary will rephrase that, because the amendment would not have been selected if it were a wrecking amendment.

John Healey: Amendment No. 150 would wreck the purpose of the provisions that we are trying to put in place in the schedule, which aims at removing a special rule that assumes that a mutual company can never have a surplus. In most cases, mutuals do not have a surplus. However, some mutual companies that have demutualised have exploited the rule to ensure that profit is sheltered from tax while in the mutual and never brought to account for tax purposes. Sub-paragraph (3) removes a rule that helps tax avoidance.

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Before I move on to speak briefly about Government amendments, I should say that I stumbled a little earlier. I may have said about reinsurance that section 83(3) does not apply if a reinsurer takes on only the morality risk.

Mr. Flight: Mortality!

10.30 pm

John Healey: The ever-vigilant ears that accompany our proceedings caught that slip of the tongue.

Government amendments Nos. 159 to 161 make a slight technical change to section 83 of the Finance Act 1989 by inserting a new subsection. The amendments will ensure that the legislation charges to tax only its intended objectives. Government amendment No. 162 operates in the same area as those amendments, but the change is even smaller. It changes ''the'' to ''any'' and performs the same function as Opposition amendments Nos. 147 and 148, but it is more economic and grammatical. It is, however, potentially significant because it protects the Exchequer. Without it, a company that used a loan to reduce its tax liability before 2003 would escape any tax charge, even when it repaid the loan.

Government amendments Nos. 163 and 165 are designed to ensure that there is no loss of tax when a life assurance company transfers its entire business to another company. A great deal of tax is at stake if the loophole is not closed, and I contend that it is clearly right to do so.

When I examined the clauses while preparing for the Committee, I had some detailed discussions with officials who have lived with the policy area for a good while. They said that it is the most complicated area of tax legislation that any of them have faced in their careers. In the light of that judgment, the Committee has managed rather well tonight by thoroughly scrutinising the proposals in the clause and the schedule. I recognise, however, that there has not been a lot of time to scrutinise the detail of the provisions in clause 169 and schedule 33 since they were published in the Bill.

I therefore suggest to hon. Members and those who advise them that if some bodies still have concerns about the provisions in the Bill, they should develop those detailed concerns, show the evidence on which they are based and enter into detailed discussions with Revenue officials. If there are real problems with which we must deal, Ministers will consider whether something appropriate should be done at a later stage. In the light of that concluding statement, I hope that Opposition Members will not press their amendments. If they decide to press them, I must ask my hon. Friends to reject them.

Mr. Flight: I thank the Economic Secretary for his comprehensive review of the highly complex measures at such a late time in the evening. In the main, he has satisfied the concerns raised by our amendments.

There is one matter on which I am certainly not satisfied. When he discussed amendments Nos. 133 and 134, which address whether past surpluses achieved by insurance companies are taxable, he suggested that profits are currently escaping tax. He

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would agree that those surpluses arose during the non-taxable mutual environment and did not arise after those businesses became commercial businesses. Economically, those surpluses must surely belong to the policyholders who paid tax on the value of the surplus assets when Lloyds acquired Scottish Widows and when Friends Provident was listed.

The Economic Secretary will know that there is disagreement between leading tax counsels. It is clearly a material point, given the problems that such businesses face in the present environment, which have done so much damage to Equitable Life. As well as the straight legal argument, there is a practical argument in relation to underlying businesses. I therefore do not want to press our amendments, with certain exceptions—we still feel that the Government's stance is not entirely correct and we want to flag that up. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 159, in

    schedule 33, page 376, line 30, leave out

    'in a period of account'.

No. 160, in

    schedule 33, page 376, line 32, after 'account' insert

    'in which the transfer takes place or any earlier period of account'.

No. 161, in

    schedule 33, page 376, line 34, after second 'account' insert

    'in which the transfer takes place'.

No. 162, in

    schedule 33, page 376, line 44, leave out 'the' and insert 'any'.

No. 163, in

    schedule 33, page 377, line 2, at end insert—

    '(2E) If subsection (2B) above applies in relation to the transfer of all the assets of the company's long term insurance fund in accordance with—

    (a) an insurance business transfer scheme, or

    (b) a scheme which would be such a scheme but for section 105(1)(b) of the Financial Services and Markets Act 2000 (which requires the business transferred to be carried on in an EEA State),

    the reference in that subsection to an amount being deemed to be brought into account for the period of account in which the transfer takes place is to its being so deemed for the period of account ending immediately before the transfer takes place.'.

No. 164, in

    schedule 33, page 386, leave out lines 41 to 43 and insert

    'In arriving at the policy holders' share of chargeable gains accruing to an insurance company under subsection (10) above there is to be ignored—'.—[John Healey.]

Mr. Flight: I beg to move amendment No. 151, in

    schedule 33, page 387, line 38, leave out from beginning to end of line 9 on page 389.

The bed-and-breakfast provisions as set out in paragraph 14 are widely accepted as a significant improvement on the original draft legislation, but there are some areas of minor concern. There are certain inconsistencies between the way in which the legislation will apply to life companies as compared with other trading companies. New section 21OB(6) excludes annual deemed disposals of unit trust holdings, but does not exclude all transactions

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relating to section 212 assets. The exclusion of those assets from the law altogether would significantly reduce the compliance burden for many companies, as it would be considerably easier for their capital gains tax systems to exclude the class of assets. Reducing the systems burden caused by the proposals is a significant matter.

Amendment No. 151 is not ideal and, after further consultation, we have worked out a better amendment. It is, therefore, a probing amendment to see whether the Government have thought about the system at issue and have anything constructive to offer.

John Healey: The amendment would delete the new provisions in the Bill intended to stop life companies from using bed-and-breakfasting assets to generate capital losses. It is perhaps appropriate that we are considering the provision at this stage of our proceedings.

Bed and breakfasting is when companies sell assets and buy them back almost immediately to create capital losses. All other companies are subjected to rules designed to stop bed and breakfasting. The Bill introduces a rule for life companies tailored to their particular circumstances.

There has been extensive consultation with the industry on these measures and, in particular, on the costs to it of complying with the new rules and the start date. Changes have been made as a result of that consultation to reduce the compliance costs and make the measures more workable for insurers.

The hon. Gentleman asked about deemed disposals of unit trusts and their exclusion. Deemed disposals are subject to special rules that spread any gain or loss over a seven-year period. Because of the spreading rule, it was not necessary to include deemed disposals in the bed-and-breakfasting rules. Actual disposals are not subject to the spreading rule, so can be used for bed and breakfasting to create losses. For that reason, it would be inappropriate to exclude all disposals of unit trusts, as that would leave an obvious loophole in the legislation.

With that explanation, I hope that the hon. Gentleman will agree to seek to withdraw the amendment.

Mr. Flight: I think that the Economic Secretary is saying that if unit trusts were put into the same category as other financial assets, that could be disadvantageous in tax terms to insurance companies. That is why negotiations and discussions so far have resulted in these differences.

This is essentially a probing amendment. The Economic Secretary has satisfied me that the territory has been gone over well, but I should be grateful if he could clarify the point about unit trusts.

John Healey: I believe that that is the case.

Mr. Flight: Right. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 165, in

    schedule 33, page 389, line 45, leave out

    'the purposes of corporation tax'

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    and insert

    'all purposes of corporation tax other than determining for the purposes of section 83(2B) of the Finance Act 1989 whether a transfer is brought into account as part of total expenditure.'.—[John Healey.]

Amendment proposed: No. 134, in

    schedule 33, page 392, line 36, at end insert—

    '444AF: Transfers of business: modifications of s.83(2)

    (1) This section applies where there is a relevant transfer, under a scheme, of the whole or any part of the business carried on by a mutual insurance company (''the mutual'') to a company which has share capital (''the acquiring company'').

    (2) In any accounting period of the acquiring company section 83(2) shall apply to so much of the amount brought into account as other income by that company as represents the accrued mutual value, but only as it would have applied before the amendments made by the Finance Act 2003, and if the requirements of subsections (4) and (5) below are satisfied in relation to the shares of a company (''the issuing company'') which is either—

    (a) the acquiring company; or

    (b) a company of which the acquiring company is a wholly-owned subsidiary.

    (3) For the purposes of this section the accrued mutual value is the fair value of the assets of the mutual immediately before the relevant transfer less the value of the liabilities of the mutual ascertained as at that date in accordance with section 5 of the Prudential Sourcebook (Insurers).

    (4) Shares in the issuing company must have been offered, under the scheme, to at least 90 per cent. of the persons who immediately before the transfer are members of the mutual.

    (5) Under the scheme, the majority of the shares in the issuing company which were in issue immediately after the transfer was made, other than shares which were issued pursuant to an offer to the public, must have been offered to the persons who (at the time of the offer) were—

    (a) members of the mutual;

    (b) persons who were entitled to become members of the mutual; or

    (c) employees, former employees or pensioners of the mutual or of a company which was a wholly-owned subsidiary of the mutual.

    (6) For the purposes of this section, a company is a wholly-owned subsidiary of another person (''the parent'') if it has no members except the parent and the parent's wholly-owned subsidiaries or persons acting on behalf of the parent or its wholly-owned subsidiaries.

    (7) In this section—

    ''contract of insurance'' has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;

    ''employee'', in relation to a mutual insurance company or its wholly-owned subsidiary, includes any officer or director of the company or subsidiary and any other person taking part in the management of the affairs of the company or subsidiary;

    ''insurance business transfer scheme'' has the same meaning as in Part 7 of the Financial Services and Markets Act 2000;

    ''mutual insurance company'' means an insurance company carrying on business without having any share capital;

    ''pensioner'', in relation to a mutual insurance company or its wholly-owned subsidiary, means a person entitled (whether presently or prospectively) to a pension, lump sum, gratuity or other like benefit referable to the service of any person as an employee of the company or subsidiary.

    ''relevant transfer'' means a transfer from a company to another person of business consisting of the effecting or carrying out of contracts of insurance which is effected under an insurance business transfer scheme.

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    (8) The Treasury may by regulations amend subsection (4) above by substituting a lower percentage for the percentage there mentioned.

    (9) The Treasury may by regulations provide that any or all of the references in subsections (4) and (5) above to members shall be construed as references to members of a class specified in the regulations; and different provision may be made for different cases.

    (10) The power to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 11.

Division No. 11]

Djanogly, Mr. Jonathan Flight, Mr. Howard
Wilshire, Mr. David

Cruddas, Jon Healey, John Hendrick, Mr. Mark Laws, Mr. David Merron, Gillian Mountford, Kali
Pond, Mr. Chris Primarolo, Dawn Southworth, Helen Sutcliffe, Mr. Gerry Trickett, Jon

Question accordingly negatived.

10.45 pm

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