Select Committee on Treasury Written Evidence

Memorandum submitted by Association of British Insurers

Lack of Adequate Analysis or Consultation on Insurance Tax Changes



  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.


  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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