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Session 2006 - 07 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
Clerks
†
attended the Committee
Public Bill CommitteeTuesday 22 May 2007(Afternoon)[Mr. Eric Illsley in the Chair]Finance Bill
(Except clauses 1,
3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23,
and new clauses relating to
microgeneration)
Schedule 9Insurance
companies: transfers
etc
Question
proposed [this day], That this schedule, as amended, be the Ninth
schedule to the
Bill.
4.30
pm
Question
again
proposed.
The
Economic Secretary to the Treasury (Ed Balls):
Thank you,
Mr. Illsley. I am pleased to welcome you back after our
morning’s activities. We were discussing schedule 9 and I had
explained in extensive detail our approach to the schedule and our
targeted anti-avoidance rule. I was talking about the schedule in the
context of the extensive consultations that have been going on over the
last year on insurance tax
matters.
I was
explaining at the end of our last sitting that there is a power in the
schedule to amend legislation for the start date of the TAAR by
regulation, which is a different approach because despite much hard
work, neither the Government nor the industry are yet fully satisfied
that the legislation will work exactly as we intend, as a number of
details remain to be sorted out. The pre-Budget report envisaged that
most of the legislation would operate from 1 November 2007, allowing
several months between finalisation of the rules and the start
date.
However, because
more time is needed for this schedule, commencement is now to be
determined by an appointed day order, which gives flexibility to allow
for several months between finalisation and its coming into effect,
whenever the form of the legislation is finalised. Changes to the
legislation that are needed to finalise it can be made by regulations,
using the power in schedule 9, which means that we do not have to wait
until the next Finance Bill or rush to get the final details right on
Report. The regulations will be introduced using the affirmative
resolution procedure to ensure that there is an opportunity for proper
scrutiny in due
course.
The
legislation, as amended by any regulations, will come into effect from
a day to be appointed, which will depend on further consultations, but
which we would not expect to be before spring next year. However, we
are confident that with further consultation we will be able to get the
final details of the schedule sorted out. I commend the proposal to the
Committee.
I want to ask
the Minister about the targeted anti-avoidance regime to which he
referred before the lunch break. As I understand it, the supplementary
avoidance rule contains a motive test and a pre-clearance test. I was
surprised and taken aback when I saw that there was a pre-clearance
test, because I remember the Minister lecturing me quite firmly in
connection with clause 27, saying that there was no need for such a
test. He
said:
“The
amendments are unnecessary because the clause contains a main purpose
test, which means that it will apply only when a person has entered
into arrangements that have the main purpose of securing a tax
advantage, which is to say tax avoidance. Such schemes do not happen by
accident. They are the result of contrived circumstances in which
transactions are undertaken or carried out primarily to achieve a
desired tax effect, as opposed to a genuine economic
purpose”.
He
continued:
“That main
purpose may be inferred from the actions of the parties to the
arrangements, but it is best understood by the person making the
arrangements. It is therefore not necessary to set up a clearance
regime when the person best placed to judge whether the rule applies is
the person who makes a clearance
application.”—[Official Report, Public Bill Committee
Finance Bill, 17 May 2007; c.
223.]
It appears that there is
one rule for clause 27 and one rule for schedule 9. Having re-read the
Minister’s explanation in our debate on Tuesday morning, I am
not clear why a clearance rule is right in schedule 9 but was not
appropriate for clause
27.
Rob
Marris (Wolverhampton, South-West) (Lab): Bearing it in
mind that the Committee is scrutinising the wording of the proposal,
among other things, I want to raise a rather more prosaic matter, and
my hon. Friend the Economic Secretary may wish to write to me about
what appears to be the most curious piece of drafting in the Bill, on
pages 156 and 157. Paragraph (10)(2) substitutes part of a sentence,
the final words of which are
“or as a business
transfer-out,”.
The Bill
continues:
“(3) In that
sentence (as amended by sub-paragraph (2))—omit “or as a
business transfer
out”.
If I am reading
that correctly—I might not be—sub-paragraph (2) inserts
some words and sub-paragraph (3)(a) immediately removes some of them.
That seems very curious to me. Perhaps my hon. Friend could write to me
about it later.
Ed
Balls:
I am very grateful for my hon. Friend’s
commentary. The claim, “This is the most curious piece of
drafting I have ever seen in a Finance Bill” is, for him, one
hell of a claim. Whether it would stand the test of true scrutiny I do
not know. He has a fine track record of highlighting curious pieces of
drafting. I can only encourage him to participate fully, not only in
the next stage of our consultation but in the affirmative procedure
that we will apply to ensure that that drafting is fully reflected in
the final schedule. If I can shine any light on this particular
curiosity I shall be happy to write to my hon. Friend. I shall ensure
that all members of the Committee are copied and that the letter is
worth framing.
I am grateful to the hon. Member
for Fareham for having highlighted the fact that we on this side of the
Committee do not take an over-dogmatic or idealistic approach to these
matters but are happy to proceed case by case on the basis of the
consultation and the evidence that arises in any particular
circumstance. Before Conservative Members get over-excited, it would be
foolish and wrong of me to lecture them, as Conservatives, on the
importance of precedent. That is clearly an important part of
conservatism, whatever—I will not go there. I fear that the
issue of grammar schools might be ruled out of order, Mr.
Illsley.
Clearance
procedures for transfer of business are in place under existing
legislation. We are replacing previous clearance procedures with a new
and more streamlined one. Unlike the discussion on the previous clause,
this is not a debate about whether to introduce a new clearance
procedure. Perhaps because of the complexity of the tax regime
legislation, clearance is judged to be desirable in this case from a
Financial Services Authority and court point of view. It was desirable
before and it will be in future. I hope that the hon. Gentleman finds
that to be an accurate, non-ideological and conservative answer to his
question.
Question
put
and agreed
to.
Schedule 9,
as amended, agreed to.
Clause 40 ordered to stand
part of the Bill.
Schedule 10Insurance
companies:
miscellaneous
Ed
Balls:
I beg to move amendment No. 90,
page 159, line 22, leave out from beginning to
end of line 10 on page 163 and
insert—
‘Contingent loans1
In section 83ZA(4) of FA 1989 (contingent loans), for “the end
of the” substitute “any time during
a”.’.
The
Chairman:
With this it will be convenient to discuss
Government amendments Nos. 92 and 94 to
96.
Ed
Balls:
I shall try to be brief, but at the same time to
provide a bit of context for the amendments in order to satisfy Members
on both sides of the Committee, who will be interested to know the
detail of the schedule.
The schedule contains a range
of measures to clarify and simplify miscellaneous
life assurance tax provisions, most of which arise from the life
assurance tax rules consultation process. I shall discuss the first of
them, covered by paragraphs 1 and 2, when I highlight the amendments.
The other important measure in schedule 10, packaged in paragraph 3, is
a reform of the treatment of so-called structural assets held by a life
insurance company in its long-term insurance fund. Structural assets
are held by an insurance company as part of its trading structure, as
opposed to assets that are expected to be turned over in the course of
its trade. A major example, and one included in the Bill, is shares in
subsidiary companies that themselves are insurance companies.
However, where structural
assets are held in a company’s long-term insurance fund,
inappropriate tax rules can arise, because the life
insurance tax rules assume that all assets held in a long-term fund are
held
or sold in the course of the company’s insurance business. For
example, dividends from insurance subsidiaries through structural
assets are subject to corporation tax, whereas dividends from
structural subsidiaries of other types of trading company are
exempt.
As taxation of
life insurance companies is based on their regulatory returns, it
follows that write-downs can result in a tax deduction where there is
no economic loss. Following consultation with the life insurance
industry, we have introduced paragraph 3, which will reform the
taxation of structural assets, treating them as capital assets rather
than trading assets. Dividends from structural assets will be exempt
from tax, giving the insurance industry parity with other
traders.
A further
measure in paragraph 4 will remove the restriction on use of capital
losses where a life insurance company sells holdings in an authorised
unit trust or an open-ended investment company to the manager of that
trust or company, and that manager is a member of the same group of
companies as the life insurer. The capital gains rules impose
restrictions on the use of capital losses on all disposals between
connected parties, such as members of the same group. The policy reason
is that connected parties have opportunities to manipulate the
circumstances of the disposal that are not available to independent
parties.
However,
where a life insurer disposes of holdings in unit trusts or open-ended
investment companies, both Financial Services Authority rules and life
insurance tax rules ensure that the disposal is at market value and
minimise opportunities for manipulation, regardless of who acquires the
assets. For that reason, the life insurance industry has argued that it
is unfair to restrict any losses arising. The Government accept its
argument, and schedule 10 will remove the restrictions.
The remainder of the
schedule comprises a general tidying up of life insurance tax rules,
modernising definitions, removing duplication by putting all
definitions in one place and repealing spent or obsolete provisions. I
look forward to the scrutiny of my hon. Friend the Member for
Wolverhampton, South-West and to seeing whether obsolescence and
obscurity have been fully
tackled.
The
amendments will modify the new provisions in response to our
consultation. Paragraph 3 will reform the taxation of structural
assets, treating them as capital assets rather than trading assets.
Dividends from structural assets will now be exempt from tax, giving
the insurance industry parity. The schedule defines structural assets
initially as shares in and loans to subsidiaries of insurance companies
that themselves write insurance business. The measure also includes a
regulatory power to add to or amend the list of structural assets;
however, the life insurance industry will be consulted before that
power is exercised.
A
short time ago, the Association of British Insurers
and other parties sent a number of representations to
Her Majesty’s Revenue and Customs about the new measures. At the
time, it was thought that the schedule would be debated last week, so
HMRC was able to deal immediately with only two straightforward points,
which are covered by Government amendments Nos. 91
and 92. But when debate on the schedule was deferred to today, I agreed
that further amendments—Government
amendments Nos. 130 to 133—should be tabled now, rather than on
Report, to give effect to many of the ABI’s requests for
clarification and
relaxation.
Mr.
Hoban:
On a point of order, Mr. Illsley. I am
slightly confused as to whether there are two groups of amendments to
schedule 10 or one. There seems to be some interrelationship between
the two. I am not sure whether we are debating one group or two
separate
groups.
The
Chairman:
There are two groups—Government
amendments Nos. 90, 92 and 94 to 96, and Government amendments Nos. 130
to 133, and 91 and 93. I assumed that the Economic Secretary was
referring to a group of 10 amendments, that he was not moving amendment
No. 130, which will be in the following group, and that he was simply
referring to the fact that they all apply to schedule 10. However,
there will be separate debates on both
groups.
Ed
Balls:
I apologise to the hon. Member for Fareham: I did
not read fully and correctly the punctuation of the schedule before us.
It seemed to me that, to understand these amendments, it was important
to put them in the context of the schedule. With your permission,
Mr. Illsley, I should like to frame all the amendments
together, accepting your right not only to determine that we should
vote on separate groups but to allow a second debate on the second
group, if you prefer. It seems that the amendments are all of a piece,
as they emerged from a detailed set of consultations that I have been
able to update in recent days. There was not a principal distinction
between the two groups, but I am happy to take your guidance,
Mr.
Illsley.
4.45
pm
The
Chairman:
I will be guided by the wish of the Committee.
If it has no objection to taking both groups together, I have no
objection. If hon. Members have no objection, we can proceed on that
basis, in which case with Government amendment No. 90 it will be
convenient to take Government amendments Nos. 92, 94 to 96, 130 to 133,
91 and 93.
Ed
Balls:
This is not about a difference of scope or
subject. Because we have had more time, we have been able to add
further amendments in recent days at the request of the ABI,
particularly Government amendments Nos. 131 to 133. We have tried to
add those amendments to meet the needs of the industry. There is one
case where we have changed the legislation to ensure that a company
cannot generate a loss earlier than it would do so naturally by moving
the asset around the company or its group.
That is not
fully to the liking of the industry, but it was necessary to ensure
that we protected the Exchequer. However, I have asked HMRC to monitor
that rule carefully to ensure that it works properly, and not harshly.
I also know that the industry does not like the way in which section
83XA(6) deals with the capital gains treatment of structural assets.
That is not something
that we have been able fully to bottom in the consultation. The
ABI’s preferred solution seemed to skew the results too far
towards an Exchequer loss, and both sides accept that that may be a
theoretical, rather than a substantial, point of difference. However,
it is an area where we are trying to do the right thing, while
protecting the revenue base. I am happy to give an assurance to both
the ABI and Opposition Members that we will keep that under review. The
amendments ensure that the structural assets are given in all cases,
including where the substantial shareholding exemption is relevant, and
where there is a transfer of business. I am happy to commend the
amendments to the schedule to the
Committee.
Mr.
Hoban:
I thank the Minister for his explanation of the
amendments, and of paragraph (3) on structural assets, which is a
difficult part of the legislation, as it affects life assurance
companies. Many such companies hold many structural assets in their
funds, which are available for use in certain circumstances to meet the
policy holders’ liabilities. There are some quite difficult
interactions with FSA rules and tax rules about the
valuation.
I should
like to raise three areas with the Minister in connection with those
rules. The first is the treatment of gains, which he has already
touched on, but I want to come back to it in a little more depth in a
minute. As I understand it, paragraph (3) excludes the movement in
value on insurance dependants from tax, so ending the double taxation
of insurance subsidiaries. Certainly in the past, although I am not
sure that it is the case now, life funds have held other trading
businesses within their funds. A distinction has been between those
involved in insurance business and those involved in non-insurance
business. I should like to understand why it is only insurance
dependants that have been excluded from
tax.
The second point
concerns interest. Movements in value on loans for insurance
subsidiaries will not be taxed and nor will the interest on those
loans. However, my understanding is that the interest deductions on the
other side of the loan transaction will be relievable against tax
credit. If the interest payable is subject to relief, why is the
interest receivable not going to be taxed? Does the Minister think it
appropriate for debts and loans to be included in our structural
assets? There is a slight risk that an asymmetrical treatment will
arise where life assurance companies engage in tax planning,
recognising the difference in treatment on the interest payable on
loans.
The third point
goes back to the central issue of the treatment of gains, on which
there is most debate between the Treasury and the ABI. Taxation is
charged when a qualifying asset leaves the long-term fund of the life
assurance company. That is determined by taking the difference between
the historic cost of the asset and its admissible value at the relevant
time, which is 1 January 2007 for existing assets, and the time that
the non-profit fund of the life assurer acquired the assets, for assets
acquired after that date.
The ABI believes that such
gains should be taxed as capital gains and therefore should attract
indexation to give them the same tax treatment as other companies.
There should also be an opportunity to compute such gains using either
the higher of the original base costs
or, where relevant, the market value at March 1982. Again, that is the
same treatment that is available to other businesses. It is a
consistency point between assets held by life assurance companies and
assets held by other companies. Will the Economic Secretary give us
some background on the reason why there is a difference in treatment?
Certainly, other businesses go through the process of being able to
have indexation gains and looking at the base cost of the 1982 market
value cost where that is appropriate. There seems to be a mismatch
between general business taxation and the taxation of life assurance
companies. Some issues of shareholder capital losses also float
through. It is not a particularly straightforward piece of legislation
which is why, despite the consultation that has been taking place since
June last year, we are still making changes as we approach the end of
May. The Government are still proposing changes, with the tantalising
prospect of further amendments to come. I should be grateful for some
clarification on those
points.
Rob
Marris:
This is the last time that I will raise this
matter, but I do so because I am getting sick of it. Amendment No. 93
starts with the word, “But”. It is not only ungrammatical
but completely redundant. I have been making the point throughout the
Bill that I hope at least in next year’s Finance Bill we can
have some decent and grammatical wording and not include redundant
words.
Mr.
David Gauke (South-West Hertfordshire) (Con): This
morning, the Economic Secretary waxed lyrical about the consultation
process. He stressed its importance and the openness and trust that has
built up between the industry and the Government. Indeed, he was very
open and honest about some of the difficulties that arose in the autumn
of 2005, which he put down in part to a lack of consultation. Why,
therefore, does the ABI state in its briefing to members of the
Committee:
“HMRC have tabled last
minute amendments, which have not been subject to the consultation
process and we are concerned at the late changes to legislation that
had previously been discussed at
length”?
Ed
Balls:
Let me answer those questions as briefly as I can.
On the subject of the word, “But”, we shall reflect and
try to draw wider lessons as part of the Finance Bill process about the
excessive use of that word at the beginning of sentences. The hon.
Member for Fareham made three points. The first concerned the
definition of structural assets and insurance dependants. Insurance
dependants are by far the most significant set of assets, which is why
the provision provides for them expressly. However, the schedule
includes the power to add other assets by means of regulation.
Discussion will continue, and if other assets need to be added to the
same category, that will be
possible.
There is a
misapprehension on the second point; interest receivable will be taxed,
so there is no asymmetry. On the third point, I refer the hon.
Gentleman to the industry views that I quoted in my introduction to
this part of the Bill. Ernst and Young’s Budget website
said:
“A key lesson from the
life tax consultation is the efficiency of the working group approach.
The use of the working group as the primary means of progressing issues
of both broad policy and fine detail is now deeply embedded as a
feature of the regular working relationship between HMRC, industry and
advisors.”
That
constitutes substantial progress from where we were 18 months ago, so
although I do not hesitate to say that improvement was clearly needed,
I hope that that has been delivered.
There were late representations
from the ABI and others in relation to the new provision—I do
not use the word “late” in a value-loaded way, I mean
merely that the issues arose late in the consultation. We could easily
have decided to postpone any attempt to sort those issues out, but we
decided that we could deal with Government amendments Nos. 91 and 92
consensually, when more time was available. The ABI requested
clarification and indeed relaxation, and our judgment in relation to
Government amendments Nos. 130, and 131 to 133, was that clarification
was the right course, even if we could not deliver the degree of
relaxation that the ABI wanted. I know that it is disappointing that we
cannot go as far as the industry would like, but we judged that maximum
clarity at this stage would be the better
choice.
As I have
said, the issues are very complicated—even more so than some of
those that we have already debated in connection with the relevant
clauses. We do not know how much the problem is theoretical rather than
real, and the best commitment that I can give to the ABI and to the
Committee is that we shall closely monitor the operation of the system.
If it works heavy-handedly or if there are indeed problems in relation
to capital gains treatment, we shall revisit the legislation. I have
already expressed my willingness to table further amendments or
regulations before next year if
necessary.
Mr.
Hoban:
I was not sure whether the Minister was about to
conclude, so may I prompt him to deal with my point about the different
treatment of gains on structural assets. Structural assets held by a
non-life insurance company will be subject to a different capital gains
tax regime from that which will apply to structural assets held within
life assurance funds. I should like to understand the reason for the
difference.
Ed
Balls:
I believe that I already answered that when I
referred to the discussions on differential treatment in section
83XA(6), which deals with the capital gains treatment of structural
assets. It is a complex issue, which we are still trying fully to
understand, and the best that I can do is repeat that discussions with
the ABI will continue in the coming weeks. If I can give more detail to
the hon. Gentleman after that, and after further expert consultation, I
shall be happy to write him a letter. Pre-empting that would be
foolish, however.
Mr.
Hoban:
I am grateful for the Economic Secretary’s
offer, but I would quite like to know now why there is a difference
rather than hear about how the problem might be
resolved.
5
pm
Ed
Balls:
With your permission, Mr. Illsley, to
avoid further detaining the Committee by attempting a detailed, complex
definition, I shall write to the hon. Gentleman, which will enable him
better to understand the ongoing consultations.
Amendment agreed
to.
Amendments
made:
No. 130, in schedule 10, page
163, line 16, leave out
‘by an insurance company held in a
non-profit fund’
and
insert
‘held by an
insurance company in a non-profit
fund.
(1A) For the purposes of subsection
(1) above—
(a) an
increase in the value of structural assets includes any amount by which
their fair value when they cease to be structural assets, or come to be
held otherwise than in any of the company’s non-profit funds,
exceeds their admissible value at the end of the preceding period of
account, and
(b) a decrease in
the value of structural assets includes any amount by which the
admissible value of the assets at the end of the period of account in
which they become structural assets, or come to be held in any of the
company’s non-profit funds, is less than their historic
cost.’.
No.
131, in
schedule 10, page 163, line 29, after
‘be’ insert
‘a structural asset or comes to be
held otherwise than in any of the company’s non-profit funds
and, immediately before it came to be a structural asset held in any of
the company’s non-profit funds it (or any part of it)
was’.
No. 132,
in
schedule 10, page 163, line 34, leave
out from ‘the’ to end of line 46 and insert
‘relevant period of
account.
(4A) For the purposes
of subsection (4) above “the relevant value difference”,
in relation to an asset,
is—
H C — A V where—
HC
is its historic cost, and
AV is
its admissible value at the relevant
time.
(4B) In subsection (4)
above “the relevant period of account”
means—
(a) in a case
within paragraph (a) of that subsection, the period of account in which
the asset ceases to be a structural asset or comes to be held otherwise
than in any of the company’s non-profit funds,
and
(b) in a case within
paragraph (b) of that subsection, the period of account in which the
asset first comes to be held otherwise than by the company or (where
the company is a member of a group) otherwise than by a company which
is a member of the group;
and
section 170 of the Taxation of Chargeable Gains Act 1992 (meaning of
“group” etc) has effect for the interpretation of this
subsection.
(4C) In this
section “historic cost”, in relation to an asset which is
or has been held in any of the company’s non-profit funds,
means—
(a) where the
asset came to be held in any of the company’s non-profit funds
on acquisition from another person, the consideration given by the
company for the acquisition of the asset,
and
(b) otherwise, its fair
value when it came to be held in any of the company’s non-profit
funds.
(4D) In subsection (4A) above “admissible
value”, in relation to an asset and a time, means the value of
the asset as shown in column 1 of Form 13 of the periodical return for
the period ending with that time (or as would be so shown if there were
a periodical return covering a period ending with that
time).
(5) In subsection (4A)
above “the relevant time”
means—
(a) in a case
where assets become structural assets held in any of the
company’s non-profit funds by virtue of the commencement of this
section, 1st January 2007,
and
(b) otherwise, the time
when the assets become structural assets held in any of the
company’s non-profit
funds.’.
No.
133, in
schedule 10, page 164, line 3, after
‘to’ insert
‘its’.
No.
91, in
schedule 10, page 164, line 20, at
end insert—
‘(4) In section
211 of TCGA 1992 (transfers of business: application of section 139 of
that Act), as amended by paragraph 14 of Schedule 9 to this Act, after
subsection (2)
insert—
“(2A) The
reference in subsection (2) above to assets included in the transfer
does not include structural assets within the meaning of section 83XA
of the Finance Act
1989.”
(5) In paragraph
17 of Schedule 7AC to TCGA 1992 (substantial shareholdings exemption:
special rules for assets of insurance company’s long-term
insurance fund), after sub-paragraph (4)
insert—
“(4A) The
reference in sub-paragraph (2) to an asset of the investing
company’s long-term insurance fund, and the references in
sub-paragraphs (3) and (4) to shares or an interest in shares held as
assets of its long-term insurance fund, do not include a structural
asset, or structural assets, within the meaning of section 83XA of the
Finance Act
1989.”.’.
No.
92, in
schedule 10, page 170, line 33, leave
out ‘amendments made by paragraph 1 to 3’ and
insert
‘amendment made
by paragraph 1 has effect on and after 10th May
2007.
( ) The amendments made by
paragraphs
3,’.
No.
93, in
schedule 10, page 170, line 35, at
end insert—
‘( ) But the
amendment made by paragraph 3(4) does not apply where the transfer of
business concerned took place before 10th May
2007.’.—[Ed
Balls.]
Schedule 10
agreed to.
Schedule 10, as amended,
agreed to.
Clause 41
ordered to stand part of the
Bill.
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