Clause
37
Insurance
companies: gross roll-up business
etc
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
With regard to insurance companies and gross
roll-up business, the ABI submission to the Committee noted that the
provisions are the outcome of detailed consultation with the industry.
In responding to this debate, does the Economic Secretary share the
view that consultation is an important part of the process? If so, are
there any particular areas in which that has been the case? The ABI
states that the Government have continued to consult on certain points
of detail. Will the Economic Secretary outline the key areas that are
still to be determined with the ABI and other industry
representatives?
Ed
Balls:
In a moment, we are going to debate a series of
detailed amendments to schedule 7, which have been—and still
are—the subject of consultation. With your permission,
Mr. Gale, I will respond to the point about the consultation
when we discuss the detail of that schedule.
The broader point that the
hon. Gentleman makes is absolutely right. When I participated in
debates on the previous Finance Bill a year ago, we stressed the
importance of consultation in the area of life assurance and insurance
company business, especially given the difficult set of events in
autumn 2005. It was generally acknowledged that while some necessary
decisions had been made to deal with central tax avoidance, in
retrospect, the consultation could have been more
effective. As a result of the work that started at that point, we have
undertaken extensive consultation in that area. Last May, Her Majesty’s
Revenue and Customs published a consultative document on various
technical aspects of the special corporation tax rules that apply to
insurance. People who have studied the consultation documents and the
legislation will understand that that is a very complex area of tax
law. In the 12 months since then, working groups made up of industry
representatives, professional advisers, and HMRC officials have
discussed at length various options for changing the life assurance
company tax framework. The working group set out to identify and
discuss areas of the regime that could be simplified, clarified or
improved. They embraced policy options and detailed technical solutions
and then the detailed consultation on the draft legislation. Therefore,
the measures that we are debating both here and under schedule 7 and
later schedules and clauses reflect the detailed consultation that has
been conducted in a constructive spirit.
From a tax point of view, it
was our intention that the outcome of the consultation on the changes
would be broadly neutral. Although that is not true for every measure
across the piece, this is not a tax-cutting or tax-raising exercise.
Consultation work is continuing to which I shall refer later. As the
hon. Gentleman said, the ABI has provided considerable time and
resources, as have many other industry
practitioners.
12.30
pm
Rob
Marris:
Can my hon. Friend assure me and the Committee
that 24 pages of explanatory notes is a
simplification?
Ed
Balls:
Commenting recently in the Tax Journal, KPMG
said:
“I am
sure that we are in a better position, with better legislation in place
and on its way, for the consultation and co-operative
approach”.
If my hon.
Friend were to ask industry representatives, they would undoubtedly say
that it is a substantial improvement to, and simplification of, the
legislation. However, it is extremely
complex.
Mr.
Hoban:
The Economic Secretary is right that the measure is
a simplification as those who remember last year’s debate will
accept. Schedule 7 rolls up five different types of business into one
category. Will he explain why permanent health insurance still has its
own separate taxation scheme?
Ed
Balls:
The hon. Gentleman is right to refer to
simplification. I wish to preview the schedule a little. We shall be
discussing the amendments in a moment but, as he said, schedule 7
contains a series of measures to simplify complex legislation
substantially. It is based on technical consultation that started last
May. Under current law, five similar, separate consultations are needed
to calculate the profits or losses arising through the insurance
company from its pensions business, its overseas life insurance
business, its life reinsurance business, its individual savings
accounts business and
its child trust fund business. A result of having five separate
computations is that, when a computation results in a loss in one
category, it cannot be set against profits in other
categories.
By
introducing schedule 7, the clause will merge those five categories of
life insurance business into a single new class of business called
gross roll-up business. Instead of five separate computations, only one
will be required. That means that losses can be offset from one old
category and set automatically against profits in
another.
Mr.
Hoban:
Will the Economic Secretary give
way?
Ed
Balls:
I have not answered the hon. Gentleman’s
previous question, but I shall give
way.
Mr.
Hoban:
Will Economic Secretary clarify his remark about
the carry forward of losses? My understanding is that, for old losses,
there is an apportionment particularly when those old losses relate to
pensions business. Can he confirm
that?
Ed
Balls:
I was saying that, instead of five separate
computations going forward, only one will be required. Under the new
regime, losses arising from one old category will be set automatically
against profits of another. I shall answer the hon. Gentleman’s
detailed question in a
moment.
We have taken
time to consider the issues properly. Although the consultation has
been very successful and the simplification is welcome, there is one
qualification. There is a large bank of unused pension business losses
throughout the life assurance industry, so allowing relief for all
existing pension business losses against future profits arising from
other categories of business would have an Exchequer
cost.
The Exchequer
set out to make the package neutral. Although that has caused some
disappointment in the insurance company, the relief for existing
pension business profits will be restricted to the pension business
proportion for future and gross roll-up business profits. That is the
consequence of our trying to make the change revenue neutral, but we
shall review the position to see if our estimates of cost stand up in
the light of more recent
figures.
Some areas
are still under consultation. The amendments to the schedule deal with
several detailed points that have arisen from that consultation. We are
still considering apportionment of income, transfers of business,
contingent loans and funding arrangements, and the structural assets,
which are all matters that we need to look at further. I hope that
Committee members will see that this is a substantial simplification
and that, although we could not deliver everything that the industry
wanted, we have gone a considerable way to meeting its
concerns.
Mr.
Hoban:
The Economic Secretary has not answered the
question I asked in my first intervention about why PHI falls outside
gross roll-up
business.
Ed
Balls:
It is true that, at the outset of the consultation,
we were attracted in principle by the
additional simplification of six into one by merging the computation for
permanent health insurance as well as the other categories that I
mentioned. However, PHI is assessed on a different basis from the other
five categories, which would make the merger process much more complex.
Also, detailed work done during the consultation process established
that six into one would have had a much greater Exchequer cost than we
had previously believed. In our judgment, the combination of
introducing greater complexity plus the Exchequer cost outweighed any
additional simplification from six being merged into
one.
The
option of adding PHI to the newly merged gross roll-up category is not
ruled out. We may be able to consider that in future Finance Bills, but
the combination of additional complexity in meeting the test of my hon.
Friend the Member for Wolverhampton, South-West plus Exchequer cost and
our desire for neutrality meant that, following the consultations, we
were not able to make the change. I commend the clause to the
Committee.
Question
put and agreed
to.
Clause
3
7 ordered to stand part of the
Bill.
Schedule
7
Insurance
business: gross roll-up business
etc
Ed
Balls:
I beg to move amendment No. 120, in
schedule 7, page 118, line 23, after
‘being’ insert
‘all of the assets of the
company’s long-term insurance fund which
are’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 105, 123 to 125, 87, 126 to 128, 88 and
89.
Ed
Balls:
The amendments would make a number of minor
technical changes to the schedule and I think that you have agreed to
take some minor amendments to schedules 8 and 9 at the same time,
Mr. Gale. All those technical amendments arise as a result
of representations made by the insurance industry and they reflect the
detail of the consultation undertaken in recent
months.
Mr.
Hoban:
I am slightly surprised at the brevity of the
Economic Secretary’s
comments—
The
Chairman:
Order. So am I. I thought that the hon.
Gentleman was intervening. I need to propose the lead
amendment.
Mr.
Hoban:
I still remain surprised at the brevity of the
Economic Secretary’s remarks given the number of amendments in
the
group.
Mr.
Gauke:
Does the Economic Secretary think that we could
save a lot of time if he just said that the Finance Bill contains
various amendments to tax
law?
Mr.
Hoban:
That may make for brevity in our proceedings, but
it would mean that the scrutiny process would be all the
poorer.
I shall not
ask questions about every amendment, because that might try the
Committee’s patience—although I am tempted—but
will the Economic Secretary explain amendment No. 105, in which the
words “linked assets” are replaced with
“assets linked to the relevant
business so far as so
referable”?
Ed
Balls:
I am surprised, because given the quality and
fairness of the Opposition I was expecting probing questions about the
group of amendments, but I am happy to put the issues in greater
context. Paragraph 17 of schedule 7 rewrites section 432C of the Income
and Corporation Taxes Acts 1988. However, a late change to the drafting
approach here was not followed consistently through the whole section.
Government amendment No. 105 ensures that the language is
consistent.
Amendment
agreed
to.
Amendment
made: No. 105, in schedule 7, page 123, line 37, leave out
‘linked assets’ and insert
‘assets linked to the relevant
business so far as so referable’.—[
Ed
.
Balls.]
Ed
Balls:
I beg to move amendment No. 121, in
schedule 7, page 125, line 39, leave
out from ‘under’ to end of line 40 and insert
‘section
444ABD(1).’.
The
Chairman:
With this it will be convenientto
discuss the following Government amendmentsNos. 122 and
129.
Ed
Balls:
Amendment No. 129 is a good example of the openness
and trust between the industry and the Government that has been built
up during the course of this major consultation on life insurance
company taxation. As drafted in the Finance Bill, new section 444ABD of
the Taxes Act 1998 gave what commentators described as an over-generous
treatment of certain losses, which could lead to double counting. We
are removing the part about losses, but that is not the end of the
story. HMRC and the industry are continuing to discuss the tax
treatment of transfers of business for reasons that I shall explain in
due course and that we will discuss when we come to the stand part
debate on the clause, if we have not already had it. I may have
referred to some of those matters when I made my introductory remarks.
If a revised or more focused rule about losses is needed, it can be
done in the regulations. Amendments Nos. 121 and 122 amend schedule 7
and are purely consequential on amendment No. 129.
Amendment agreed
to.
Amendments
made: No. 122, in
schedule 7, page 126, leave out lines 12
and 13 and insert ‘section
444ABD(1).’
No.
123, in
schedule 7, page 130, line 35, leave
out ‘in relation to that category of
business’.
No.
124, in
schedule 7, page 130, line 35, at
end insert—
‘(3A) Where the
relevant income arises from foreign currency assets, the whole of the
foreign tax is attributable to gross roll-up business, unless the case
is one where subsection (7) below
applies.”.’.
No.
125, in
schedule 7, page 130, line 40, leave
out from ‘for’ to end of line 42 and insert
‘the words
following “is” substitute “gross roll-up
business.”
(7) In subsection
(6)—
(a) omit “or
432D” (in both places),
and
(b) for “the
category of business in question” and “that
category” substitute “gross roll-up
business”.
(7A) In
subsection (7), for—
(a)
“the category of business in question”,
and
(b) “that
category”,
substitute
“gross roll-up
business”.’.
No.
87, in
schedule 7, page 132, line 8, after
‘(b)’ insert ‘of subsection
(6)’.
No. 126,
in
schedule 7, page 133, line 5, leave
out ‘subsection (1)’ and insert ‘subsections (1)
and (1A)’.—[Ed
Balls.]
Question
proposed, That this schedule, as amended, be the Seventh schedule
to the
Bill.
Mr.
Hoban:
As I indicated on clause 37, this is a
simplification that has proceeded with the support of the insurance
sector, and the engagement of its advisers. As the Economic Secretary
rightly pointed out, this new spirit of openness and consultation comes
from the consequences of the announcement made in autumn 2005, which
caused considerable unhappiness and uncertainty in the life insurance
sector. This is the second year running that we have discussed changes
to the insurance sector. There were significant reforms in 2003, 2004,
2005, 2006 and 2007. It would be helpful if Economic Secretary could
indicate whether we are going to have to go back round the hurdles on
the matter in 2008, or whether he feels that this is a settled set of
reforms that are unlikely to see major changes.
I have a detailed question
about schedule 7. As I understand it, the losses of the gross roll-up
business cannot be carried back for 12 months, whereas losses of
ordinary businesses and enterprises can be. Why are life assurance
businesses being treated differently in this context from other types
of business? Can the Economic Secretary illuminate the Committee a
little more on the issue of transfers, to which he alluded in the first
group of amendments? My assumption is that transfers within a life
insurance company should not give rise to a tax loss or gain. He gave
the impression that that aspect of these rules has not been pinned down
yet. It would he helpful to have greater clarity on that
matter.
Ed
Balls:
On the former point, prior to 2006, there had been
previous Finance Bills in which there were changes to life insurance
and taxation. However, they had all been incremental and not
first-principled. It was discovered in the autumn of 2005 that the
operation of the life assurance taxation regime was so complex that
neither Her Majesty’s Revenue and Customs nor the industry
itself fully understood how the rules worked and how they interacted
with a rapidly changing insurance world. An HMRC decision, announced in
debates at that time, gave the impression of a small cost, which turned
out to be a potentially substantial cost until the change was
modified.
In order to
avoid such problems in future, greater dialogue or consultation was
needed, and we also needed to simplify the regime from first
principles, which is what has been happening in the past year. The
consultation
and the changes we are introducing now are
materially different from the changes to the tax regime for life
assurance businesses in previous Finance
Bills. 12.45
pm
As I said,
consultation is still ongoing on some matters, and our detailed
technical amendments to the schedule following consultation are
testimony to that fact. It would be foolish to rule out coming back
next year or on Report with further detailed, consequential amendments
following this reform and no member of the Committee, or anyone in HMRC
or in the industry would want to do so. However, we will not need to
make a first principle reform, as has been done in the last
year.
If we make
more progress in any respect on the matters I that listed a moment ago,
including the transfers of business and apportionment of income
contingent to the loans and funding arrangements of structural assets,
we will be happy to return with further proposals in 2008. We will give
the Committee a detailed update on the operation of the regime so far
in a pre-Budget report, so there will be plenty of time for
discussion and consultation if changes are needed next year. I will
reply to the question on transfers asked by the hon. Member for Fareham
when we come to clause 39 and schedule 9.
We have made a substantial
amount of progress on this complex area; the clauses, schedules and
relevant amendments before us are not controversial for the industry.
They do not give everything that people want, but they go a substantial
way towards doing so, and I hope that the Committee will agree to the
schedule.
Mr.
Hoban:
Will the Minister answer my question about the
carry-back of losses of gross roll-up of business,
please?
Ed
Balls:
I am not sure if I will be able to answer that
question. With your permission, Mr. Gale, I will answer it
when we come to the next clause.
The
Chairman:
The Minister is entirely responsible for his own
contribution to the
debate.
Question
put and agreed
to.
Schedule
7, as amended, agreed to.
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