Memorandum submitted by Association of
British Insurers
Lack of Adequate Analysis or Consultation
on Insurance Tax Changes
CHANGES TO LIFE TAXATION ANNOUNCED ON 29
SEPTEMBER 2005
BACKGROUND
An announcement that the tax authorities proposed
to make changes to the tax legislation affecting life companies
reserves was issued on 29 September 2005. The proposed changes
were to take effect immediately in that they applied to all accounting
periods ending on or after 29 September.
The measures were described as "anti avoidance"
and were introduced without consultation. As announced, however,
they went far wider that any tax avoidance that HMRC believed
existed. Not only would the tax measure have taxed a number of
non profit investment reserves held for perfectly legitimate commercial
and prudential purposes, the announced measures would have a significant
impact on members with investment reserves backing with-profit
funds.
As companies analysed the impact of HMRC's announcement,
the scale of the potential impact became clear. Legal & General
suggested that HMRC's announcement would cots it alone £500
million. Several insurers suggested to the ABI that the tax moves
could them several hundred million pounds. At the same, it is
relevant to note that some firms, eg Prudential and Friends Provident,
were not hit because their reserves had a different technical
structure.
The ABI lobbied hard, in a co-ordinated manner
with member firms to point out the serious damage to the industry
that the HMRC proposals would cause. In the light of these HMRC
eventually announced on 3 November 2005 changes which will restrict
the impact of the proposals. However further work is needed to
ensure that the measure only targets areas where HMRC believe
there is avoidance. Detailed discussions between the industry
and the tax authorities are now underway. We believe a viable
and acceptable outcome can be reached which will not, in any way,
mean that HMRC has failed to address tax avoidance but which also
means that the insurance industry can continue to legitimately
manage its reserves.
It was described by the ABI as a "smash
and grab raid on the savings industry", not least because
targeting the prudential reserves of insurers was a very odd place
to look for avoidance.
THE ISSUES
RAISED
HMRC clearly have a duty to address tax avoidance,
and cannot always do so on a consultative basis. Nevertheless
the manner of HMRC actions meant there was a widespread disruptive
impact on the insurance industry. Moreover this is not the first
time the insurance industry has been subject to ill-thought out
"smash and grab" attempt by the tax authorities.
The 2004 Pre-Budget Report saw the tax authorities
attempting to introduce complex and wide-ranging changes to the
taxation of with policyholders funds in with profits funds by
order rather than by primary legislation. These changes were announced
alongside a "consultation" period of less than a week.
As with the tax changes announced this autumn, the 2004 proposals
were ultimately withdrawn as the potential scale of their impact
became clear. Nevertheless, the result was a period of significant
disruption and uncertainty for the life insurance industry.
These examples of rushed attempts at tax changes
with little or no prior consultation with the industry all have
a potentially negative impact on reputation, financial valuations
and solvency. While in recent cases subsequent discussions with
HMRC have led to the worst aspects of the proposals being removed,
from a public policy point of view it seems highly desirable to
find alternative means of discussing these issues in a way that
avoids risking self-inflicted damage.
The insurance industry urges the need for particularly
careful assessment of the impact and second order effects of actions
by the tax authorities, prior to the issuing of new tax regulations
with little or no notice period. Such assessments seem to have
been wholly lacking in recent tax announcements in the insurance
area.
The industry acknowledges that life taxation
is a specialist and somewhat arcane area. The industry also acknowledges
that there may well be a strong case for reform in some areas
of insurance taxation. The complexity of the issues nevertheless
argues for particular consideration to be given to future insurance
tax announcements where they are issued without consultation with
the industry. It is vital for a healthy, confident insurance industry
that we avoid the recent disruption caused by HMRC announcements
becoming an annual event in the calendar.
6 December 2005
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