Clause
38
Insurance
companies: basis of taxation
etc
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke:
Briefly, I do not know whether the Economic
Secretary plans to make a comment on the basis of taxation for
insurance companies, but as I understand it, the arrangements will mean
that there will be one basis of taxation. Previously, HMRC was able to
alter the basis of taxation in particular circumstances from what is
described as “I minus E”. Will the Economic Secretary
explain the circumstances in which that would have happened and why?
When the Treasury, or HMRC, no longer has the ability to alter the
basis of taxation, what will be the effect on
revenue?
Ed
Balls:
Schedule 8 and clause 38 carry on the process of
simplification that I explained in my earlier comments. In particular,
the measures abolish what is known as the Crown option—the
ancient rule under which an HMRC officer can, even in these days of
self-assessment, decide whether a life insurance company should pay tax
on a trading profits basis or on the I minus E basis that nearly always
applies to such companies. The current system has been part of the life
insurance tax rules since 1915.
When HMRC published its
technical consultation document in May 2006, there was a small passage
about the Crown option. It became clear from the responses to the
document that the uncertainty of not knowing when the Crown option
would be exercised was causing problems for the life insurance
industry, especially in the calculation by a company’s actuaries
of its embedded value profits. There are ways for insurance companies
to show more realistic profit figures than those that are given by the
regulatory accounting rules of the Financial Services Authority. They
require the actuary to predict the tax treatment of the business over
the coming decade or so. The complete change of basis that is caused if
the Crown option is exercised plays havoc with those calculations. HMRC
and the industry have together devised a new approach to replace the
Crown option, to which schedule 8 gives effect.
The schedule sets out
unequivocally, with no element of choice for either HMRC or companies,
the circumstances in which a company will be assessed on the trading
profits basis. They are restricted to two types of specialist business.
Pure reinsurers—companies that do reinsurance business only in
the market—will, as they are now, always be taxed on the trading
profits basis. The same will apply to companies whose only business is
gross roll-up business, which we discussed in relation to schedule 7.
All other business that is not gross roll-up business, such as ordinary
life assurance business with UK residents, will be taxed only on the I
minus E basis.
Schedule 8 sets out how
changes between the two bases will be handled, which is particularly
relevant for any change of basis that is caused by the schedule itself.
There are a number of transitional provisions. As part of the agreed
package, the schedule improves the mechanism for ensuring that the I
minus E basis of taxation results at least in the taxation, at
mainstream corporation tax rates, of the life insurance
company’s profits that are not being accrued for policy
holders.
The measure
also ensures that losses and other reliefs that used to be permanently
lost when there was a change from the I minus E basis to the trading
profits basis are instead preserved and are restored if there is a
subsequent change back to the I minus E basis. That change has been
requested by and is particularly welcomed by the life insurance
industry.
As a
result of extensive consultation, the schedule provides a certain,
modern and robust set of rules by which to decide basic questions about
the taxation of life assurance companies in a way that does not have an
overall revenue cost to the Exchequer. The rules will provide greater
certainty. The life assurance sector and its taxation are very
different from other parts of the economy. In answer to the question on
why that sector is treated differently regarding losses that are
carried
back, let me say that it is one consequence of the I minus E regime for
life insurance taxation. Another consequence of those rules is that we
have to have different rules for the way in which losses are carried
back. I hope that that answers hon. Members’
questions.
Question
put and agreed
to.
Clause 38
ordered to stand part of the
Bill.
Schedule
8
Insurance
companies: basis of taxation
etc.
Amendments
made: No. 127, in schedule 8, page 140, line 10, leave out
‘85A(3)(a)’ and insert
‘85A(3)(b)’.
No.
128, in
schedule 8, page 140, line 17, leave
out ‘85A(3)(a)’ and insert
‘85A(3)(b)’.
No.
88, in
schedule 8, page 144, line 39, leave
out from beginning to ‘charged’ in line 41 and
insert
‘the profits of
the life assurance business of the company for the preceding accounting
period were’.—[Ed
Balls.]
Schedule
8, as amended, agreed
to.
Clause 39
ordered to stand part of the
Bill.
Schedule
9
Insurance
companies: transfers
etc
Amendments
made: No. 129, in schedule 9, page 151, leave out lines 12 to
19.
No. 89, in
schedule 9, page 159, line 13, leave
out from ‘to’ to end of line 14 and insert
‘periods of account beginning on
or after 1st January 2007 where the transfer of business or
demutualisation concerned took place before 21st
March’.—[Ed
Balls.]
Question
proposed, That this schedule, as amended, be the Ninth schedule to
the
Bill.
Mr.
Hoban:
I had expected the Minister to rise, because he
suggested that he would give further information on transfers, which I
think fall within the subject of the schedule. I should be grateful if
he could clarify the matters for debate and discussion between HMRC and
the Treasury.
Ed
Balls:
I am very happy to explain the amendments and the
schedule. Schedule 9 deals with the taxation of transfers of insurance
business. Government amendment No. 89 makes a minor clarification.
Schedule 9 repeals section 83(3) of the Finance Act 1989 and associated
rules, which apply to transfers of business. In general the repeal will
have effect from an appointed day, which will be set by an order in due
course.
Where a
transfer of business took place before Budget day the repeal is
intended to be effective for any period beginning in 2007. However, the
life insurance industry has said that there is some doubt about whether
the measure has that effect. To deal with that uncertainty, Government
amendment No. 89 puts matters beyond
doubt.
As I have
said, schedule 9 contains a number of measures to reform the law
relating to transfers of life insurance business between insurance
companies.
Transfers of business are a common feature within the insurance
industry, particularly as the industry consolidates and reorganises. A
merger of companies within a group can reduce the cost of capital
significantly and make operations more efficient. The Government do not
want in any way to stand in the way of such important transactions.
Indeed, we are keen to facilitate them and to reduce the administrative
and compliance burdens associated with genuine commercial
transfers. Transfers
of business have also, however, presented opportunities for some to try
to extract profits in untaxed form, against the intentions of
Parliament. It has therefore been necessary for the Government to
introduce a number of complex measures over recent years to block a
succession of schemes designed to avoid tax on a transfer of life
insurance business. That has led to the tax rules for transfers of
insurance business becoming the most complex part of this very complex
area, and there is anecdotal evidence that that complexity is
inhibiting genuine commercial transactions. It will come as no
surprise, therefore, that simplifying the transfer rules was an
important objective for the industry in the consultation process. We
want to facilitate that if we
can.
Schedule 9 is
designed to achieve those twin objectives by facilitating commercially
driven transfers and protecting the tax base. The basic principle on
which we worked in producing the legislation is that transfers of
business should be tax neutral, but only where assets and liabilities
pass from the long-term insurance fund of the transferor to the
long-term insurance fund of the transferee. Schedule 9 achieves that by
clarifying the existing rules and by adding new rules where previously
there was only
guidance.
To sit
alongside those clarified and simplified rules, there is a targeted
anti-avoidance rule. That will not affect “plain vanilla”
commercial transfers, but it will protect the tax base where there is
any attempt to reduce profits or create artificial losses during the
transfer process. The TAAR will replace most of the intricate and
mechanical anti-avoidance provisions
introduced over previous years, leading to a considerable
simplification, as I have explained and on which we had, I think, some
agreement a moment ago. The TAAR will operate in association with a
clearance process, so that where Her Majesty’s Revenue and
Customs is satisfied that obtaining a tax advantage is not a main
purpose of a proposed transaction, the TAAR will not be invoked. In
addition, the TAAR will not apply where a group can show that one
company in that group may have got a tax advantage but there is a
corresponding tax disadvantage to another
company. In addition
to the measures in the schedule, HMRC will be streamlining its
processes where there is an insurance transfer. HMRC officials have
talked to the FSA and will be talking to actuaries who make reports to
the court on insurance business transfers, to see whether the
requirements laid down by them about tax clearances can be made less
burdensome on both HMRC and the applicant companies and their
advisers.
As with
the other schedules, there has been full consultation on the measure,
but it is somewhat different with respect to its commencement rules:
many of the new rules, including the TAAR, start from an appointed day.
There is a power in the schedule to amend the legislation by
regulations.
The
Chairman:
Order. The Committee will sit again at 4.30,
with Mr. Illsley in the Chair. Mr. Illsley will
also be in the Chair on Thursday morning. From the schedule laid down
by the House for the progress of the Bill, it is clear that we are
running behind schedule. I therefore give the Committee notice now that
I shall if necessary ask the usual channels to consider timetabling a
third sitting on Tuesday 5 June, if that becomes necessary. I mention
that now because I have always found that it is convenient to inform
hon. Members, and more particularly the staff, who have their lives to
plan as well, that that might happen. Hon. Members can then adjust
their diaries if
necessary.
It
being One o’clock,
T
he
Chairman
adjourned the Committee without Question put,
pursuant to the Standing
Order.
Adjourned
till this day at half-past Four
o'clock.
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