The Financial Secretary to the Treasury (Jane Kennedy): I beg to move,

It is a pleasure to serve under your chairmanship, or chairwomanship, Miss Begg. I am covering for the Economic Secretary to the Treasury and in considering the detail of the order, I contemplated moving it quickly and seeing whether I could reply to the debate. However, when I saw the sexy topic, I thought it important that I should say a few words.

Although the matter is complex, it was debated thoroughly during last year’s Finance Bill. At the 2006 Budget, the Government announced that there would be a major consultation exercise with the life insurance industry to look at ways of clarifying and simplifying the corporation tax law applying to life insurance companies. Transfers of business between life insurance companies was one of the main areas discussed, and that is what we are considering today.

Following very productive discussions between the life insurance industry and Her Majesty’s Revenue and Customs officials during this process, rules to simplify transfers of business legislation were included in schedule 9 to the Finance Act 2007. They were designed to achieve the twin aims of facilitating commercially driven transfers, while protecting the corporation tax base.

The basic principle behind transfers of business legislation is that transfers of business between life and insurance companies should be tax neutral where all the 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 this tax neutrality.

However, to ensure that the tax base is protected, there is also a targeted anti-avoidance rule, known as a TAAR. The TAAR does not affect “plain vanilla” commercial transfers, but it does protect the tax base where there is an attempt artificially to reduce profits or to create artificial losses during the transfer process. The TAAR replaces most of the complex anti-avoidance provisions introduced over the years, and incorporates a clearance procedure to allow companies to be given certainty of treatment in advance of transfers taking place.

To allow time for further discussions with the industry on the detail of the rules and to ensure that they will work properly, the Finance Act 2007 contained a time-limited power for the Government to lay further regulations, subject to affirmative resolution debate. The regulations in the order that we are debating reflect the outcome of this further consultation between industry and HMRC.

1 am confident that this package of measures, which is the product of full consultation with the life insurance industry, results in a significant simplification of the tax law applying to transfers of life insurance business. I commend the order to the Committee.

Mr. Mark Hoban (Fareham) (Con): May I, too, welcome you to the Chair, Miss Begg? I also welcome the Financial Secretary to her role as temporary custodian of insurance tax matters. I bet she cannot wait for the Economic Secretary to the Treasury to return. Those of us who have been through insurance tax on two Finance Bills realise that it is not the most straightforward area of tax; it takes time to get up to speed. I suspect that the hon. Member for Taunton will find that out in the weeks and months ahead, as he takes up his new responsibilities in the Liberal Democrat shadow Treasury team.

There is no disagreement—certainly on our part—with the order. It is the outcome of detailed consultation with the Association of British Insurers and that has characterised the development of tax law in this area in recent months. The Financial Secretary will recognise that consultation is a good thing when it comes to tax changes for insurance companies, because that is one of the unfinished areas in the capital gains tax reforms that were announced in October. I am sure that there are more debates to be had on that in the weeks ahead.

I have two brief questions. One reason why the Government introduced a more streamlined process for transfers is to aid the administrative ease of life insurance companies. Page 5 of the explanatory notes refers to the issue of spreading changes back over previous accounting periods where a company recognises an unusual profit. One change in the order aims to ensure that there are not too many accounting periods. Why do we still have the process of spreading over accounting periods, rather than having a pre-determined time? That would make it easier to introduce changes, so that we do not have to create what is effectively a one-day period of account.

My second question concerns the targeted anti-avoidance rules. I understand that the changes restrict the scope of the TAAR. This is being done through secondary legislation. That is in stark contrast with the debates we had in the Finance Bill Committee, where restrictions in respect of other targeted anti-avoidance rules were made not through primary or secondary legislation but through guidance. Why has the Treasury opted for restriction through secondary legislation, rather than simply issuing further guidance?

Mr. Jeremy Browne (Taunton) (LD): It is a pleasure to serve under your chairmanship, Miss Begg. I do not think that I have had that opportunity before.

In such Committees, the business sometimes appears impenetrable on first inspection, but after sifting through the papers it all becomes much clearer. I am not certain that that is the case this time, so I shall tread tentatively in my short contribution, but coming at this from a layman’s perspective may help the Committee.

While taking into account the temporary capacity in which the Financial Secretary is covering these responsibilities, I should like to ask her a few questions that are not technical but will, I hope, shed greater light on the effect of the changes. First, in case a policy holder, claimant or someone with an insurance or reinsurance business asks me about the effect of the changes, I would be interested to know what tangible effects there will be. Is there anything that need cause them concern? Do the Government think that the industry as a whole will be affected? Will the legislation affect the behaviour of the industry?

My final point concerns revenue to the Government. The Financial Secretary talked about neutrality, but I was not clear whether she meant neutrality compared with not having adopted the proposals at all, or compared with existing budgets. Is this potentially a revenue-raising device for the Government? If so, what sums does she imagine will be transferred to the Treasury?

Jane Kennedy: The hon. Member for Fareham asked why we have chosen to spread over accounting periods, rather than having a set time. I am advised that nearly all periods will be 12 months, so in practice, this will make no difference. He asked why we opted for secondary legislation rather than further HMRC guidance. It gives more certainty to the industry if changes are contained in legislation. We are debating the order because that was the course of action determined in 2007. We are following up promises made as a result of the consultation that led up to the 2007 Budget.

The hon. Member for Taunton asked what tangible effects there would be and why we are doing this. In coming to the Treasury, I have been very conscious of the sustained criticism of the tax regime. We have been repeatedly berated for having a very complex tax structure. I assure the Committee that we really are simplifying the legislation, as a result not only of the changes in Budget 2007 but in the order. I do not claim that the legislation is in any way simple, but it is none the less simpler.

The order will make commercially driven transfers easier; the industry was keen to achieve that. The targeted anti-avoidance rules operate on the basis of the expected advantage rather than the actual advantage because at the time when the calculation of the advantage is made, it is impossible that all the associated operations will have taken place.

The hon. Gentleman asked what was meant by the reference to neutrality. This order is not tax-raising, but the anti-avoidance rule protects the tax base and the whole consultation package is expected to be neutral over three years. I hope that those answers are sufficient to reassure hon. Members, who rightly pointed that while the matter is complex, it is worth probing. I hope that they and those affected by the decisions will be pleased by the outcome of the consultation and the action that we are taking today. I hope that the order will receive a fair wind from the Committee.

Question put and agreed to.

Committee rose at eighteen minutes to Five o’clock.