Clause
38
Tax
treatment of participants in offshore
funds
Mr.
Hoban:
I beg to move amendment No. 81, in
clause 38, page 18, line 33, at
end insert
‘or otherwise altering or amending
the definition of an interest in an offshore fund and the circumstances
in which an investor is treated as disposing of an interest in an
offshore
fund’.
The
amendment is relatively straightforward. Clause 38 is an enabling
clause and will allow the Government, through statutory instruments, to
establish the new offshore funds regime. I shall return to that on
clause stand part. The process set out in subsections (4) and (5)
requires that the first statutory instrument, creating the new regime,
must be dealt with by the affirmative procedure. We welcome that level
of parliamentary scrutiny. However, subsequent statutory instruments
will be dealt with by the negative procedure. Having spent some time
talking about the rights of Parliament, I shall not discuss the
relative merits of the affirmative and negative procedures, but I do
want to highlight an issue that one representative body has
raised.
In the
amendment, we accept that the negative procedure should be used for
subsequent changes to the initiating instrument, if that is the right
word, but we suggest that changes to the core definition of
circumstances in which an investor will be taxed on offshore funds
should be dealt with by the affirmative procedure. That definition is
at the heart of the changes to the rules on offshore funds, and there
should be proper legislative scrutiny of changes to it.
The draft
instrument with which the Minister kindly provided the Committee
contained significant parts about administrative arrangements,
including on the provision of written information to Her
Majesty’s Revenue and Customs, the inquiries that HMRC can make
into a reporting fund and breaches of reporting fund requirements.
Those are all important, but we accept that it might be appropriate for
them to go through the negative procedure. However, we believe that a
substantive change to the rules on offshore funds should go through the
affirmative procedure. The amendment is intended to carve out that core
definition and ensure that it continues to be dealt with through the
affirmative
process.
4.45
pm
Kitty
Ussher:
The hon. Gentleman has explained the effect of the
amendment, so I shall not repeat that. I do not feel that the amendment
is necessary for two reasons. First, it is normal in tax legislation
for regulation-making powers to be introduced. The first exercise of
the power is made by affirmative resolution. That is what form a
substantive debate on the new scheme would take. Subsequent exercises
are made by negative resolution. That follows the same format as that
for UK authorised investment funds introduced in 2005. It is simply
standard
procedure.
Concerns
have been raised that we might use this power to change the tax
definition of what constitutes an offshore fund. That is not the case.
I reassure hon. Members that the Government have no intention of
changing the tax definition of what constitutes an offshore fund by
means of secondary legislation. Indeed, the Government decided not to
change the definition this year, having listened to industry, and are
committed to further discussions before changing the definition in next
year’s Finance Bill. It will therefore be properly scrutinised
at that stage. I ask the hon. Gentleman to withdraw the amendment
because it is
unnecessary.
Mr.
Hoban:
I am grateful to the Economic Secretary for her
reassurances about how the changes to the definition will be dealt with
in next year’s Finance Bill, and that it is not the
Government’s intention to change the rules about the
characteristics without proper legislative scrutiny through primary
legislation. In light of the assurances given, I beg to ask leave to
withdraw the
amendment.
Question proposed, That the clause stand part of the Bill.”
4.46
pm
Sitting
suspended.
5.12
pm
On
resuming—
The
Chairman:
Thank you very much to those who helped Sam. He
is fine now and he is on his way home. It was a bit of a scare, but
thank you to everybody who acted as they did, and we wish him all the
best.
Mr.
Hoban:
We were debating whether clause 38 should stand
part of the Bill. I have a series of questions to put to the Minister,
which are based on representations made by a number of different
bodies.
The first
question is quite fundamental to the legislation. One of the concepts
that underpins this framework is the distinction between income and
capital, and the fact that they are taxed in different ways. There has
been some comment that that distinction is in danger of outliving its
usefulness, particularly in the convergence on accounting standards and
the new and more complex products that will be included in offshore
funds. It would be quite useful if the Minister would explain why the
Treasury believes that this distinction is still appropriate.
Furthermore, what implication does the Minister think would arise from
the abolition of the distinction between capital and
income?
Secondly,
the new rules require an offshore fund to report 90 per cent. of its
income. It has been suggested that the calculation may use the existing
UK EP rules. However, there have also been suggestions that, given the
fact that some of these funds are domiciled elsewhere, there are
alternative accounting practices that could be used instead to reduce
the cost of complying with these rules. I wonder if the Minister could
explain the framework that she expects to be in place for the
calculation of the income to be
reported.
The
approach that has been taken is that funds should seek advance
certification to obtain reporting fund status. However, there is
concern that the annual submissions required by HMRC will create
uncertainty; I certainly hope not, and I hope that the fund continues
to qualify. We might therefore introduce an element of retrospectivity
into the way in which funds are granted reporting fund status. Has the
Minister given any thought to how the issue might be addressed and
whether there is a mechanism that could reduce the
uncertainty?
My next point
relates to the role of participants. In its submission, the Institute
of Chartered Accountants notes that there is a contradiction between
clauses 38 and 39. Clause 38 states that the new rules are about the
tax treatment of participants in offshore funds, but clause 39 focuses
on the treatment of the funds themselves. Under the new rules, only the
fund itself can apply for reporting fund status. Under the existing
rules for offshore funds, the participant can request that the Treasury
treat the fund as a distributor fund so that it can keep the current
favourable tax treatment. Has the Treasury given any thought to the
participant being able to apply for the fund to have reporting fund
status?
Clearly,
offshore funds marketed in the UK will have an incentive to apply for
reporting fund status, but other funds that people acquire will not
have that status. A fund may derive no benefit from seeking reporting
fund status if its main market is in the US, but an investor might want
it to have that status because that might be advantageous in a tax
sense. Non-UK nationals resident in the UK who hold funds that invest
in their original jurisdiction might, for example, want to apply for
reporting fund status. Similarly, an expat who has
bought funds in the US and moved back to the UK might welcome the
possibility of that fund having reporting fund status. If the fund
itself did not apply for it, however, there would be no rules to enable
the participant—the fundholder—to do so themselves. That
option is available under the current rules, and I just wondered why it
had not been carried forward into the new
rules.
Kitty
Ussher:
Let me say just a couple of general words before
addressing the specific points raised by the hon. Gentleman.
As we have
discussed, the clause provides a regulation-making power to allow the
tax regime for UK investors investing in offshore funds to be
modernised and simplified. The offshore fund legislation seeks to
prevent UK investors from gaining beneficial tax treatment by investing
in offshore vehicles, where income flows could be converted into
capital to gain tax advantages.
The
marketplace for investment in offshore funds has changed significantly
since the rules were originally introduced in 1984. The Government have
worked to modernise the rules, while retaining the original objective.
The modernised tax regime for offshore funds has been developed through
extensive consultation with stakeholders. A paper with policy proposals
was issued in October 2007. That was followed by summary of responses
and further policy proposals in March. The draft regulations are in the
public domain for consultation, and copies have been circulated to
members of the Committee, as the hon. Gentleman was kind enough to
mention. The final version will be published in the autumn, with a view
to laying them before the House around the end of the year. As we have
discussed, the regulations will be made under the affirmative
procedure, so they will be subject to full scrutiny by the
House.
The hon.
Gentleman made several points. He asked why clause 39 allows for a
retrospective effect, and she aid that that would perhaps lead to
uncertainty in the industry. The clause permits a retrospective effect
only in limited circumstances, and it will be used only if it becomes
clear following further consultation on the regulations that the
industry wants them, or parts of them, to take effect earlier than the
date on which they are laid in the House of Commons. I want to make
that clear to the Committee to remove any uncertainty.
The hon.
Gentleman also asked whether moving to a new regime would lead to
additional costs for funds, because systems will have to be updated and
so on. The changes that we are making follow representations from the
industry have been developed through consultation. That is a running
theme in much of today’s debate. Broadly speaking, we may need
to make adjustments to offshore fund systems to reflect the
modernisation changes, but because we are working in
tandem—shoulder to shoulder—with industry we envisage
that the changes will lead to long-term benefits.
The hon.
Gentleman also asked why an investor cannot apply for reporting fund
status on behalf of an offshore fund. That issue will be considered as
part of the consultation on the offshore funds tax regime. In March
this year, we stated in our most recent publication on the subject that
the Government will consider exploring the feasibility of responses on
that issue in relation to investment by UK investors. HMRC receives
approximately
six applications a year from UK investors who wish to treat their
offshore fund investment as if it were a distributor status offshore
fund. We will consider the evidence on whether to replicate similar
rules in the modernised offshore funds tax
regime. The
hon. Gentleman asked about the framework for the calculation of the
income to be reported. Again, in the document “Offshore Funds:
the Next Steps” that we published in March, we set out our
thoughts on that and on how the computation of income should operate.
The process will be based on acceptable accounting standards and
information, as set out in the regulations that are subject to
consultation. He also asked why the figures are 90 per cent. in
relation to reporting. In principle, it was agreed that 100 per cent.
was appropriate, and the reduction to 90 per cent. was to deal with
cases where the amount could not be easily estimated—it is a
practical, administrative issue. I hope that I have answered the
questions he has asked. If I have not responded to all the hon.
Gentleman’s points, I am happy to do so in
correspondence.
Question
put and agreed
to.
Clauses
38
ordered to stand part of the
Bill.
Clause
39 ordered to stand part of the
Bill.
Clause
40 ordered to stand part of the
Bill.
Schedule
17
Insurance
companies
etc
Mr.
Hoban:
I beg to move amendment No. 92, in
schedule 17, page 242, line 3, leave
out sub-paragraphs (5) and (6).
Paragraph (5)
of schedule 17 deals with the tax treatment of fronting reinsurance
commitments, and seeks to tackle a situation in which a life company
obtains tax relief for the costs of acquiring business—for
example, the commission it pays to the person who refers the business
to them—that is reimbursed by the insurer either wholly or
partly for all of those costs. All the risk transfers from the life
company to the reinsurer. In this case, the life company claims tax
relief for the expenses incurred regarding how much is actually
reimbursed by the insurer. The paragraph deals with a particular aspect
of fronting. As part of a package, a retailer may sell a term
assurance, which would be placed with a life company that is then
reinsured with a captive insurer who is part of the same group as the
retailer. The retailer will receive commission from the life assurer
who will be reimbursed for that by the reinsurer. The life assurer will
receive tax relief on the cost of acquiring the business, but, under
the new rules, will not be able to do so where the retailer who
receives the commission and the reinsurer who pays life assurance
commission are part of the same group. The measure will tackle a
practice that has
emerged.
The
Association of British Insurers raised concerns about the provision,
but it has—in my interpretation, with a sense of
reluctance—accepted paragraph (5). We are concerned about the
retrospective nature that arises in sub-paragraphs (5) and (6). Why is
there a retrospective element? I understand that acquisition expenses
for life policies are, for taxes purposes, spread forward over seven
years, so expenses incurred in 2002 will obtain tax
relief between 2002 and 2008. However, the changes under paragraph (5)
do not apply just to expenses incurred after the date of the pre-Budget
report, when the announcement was made, but to all unrelieved expenses.
Costs incurred under existing tax law between 2002 and 2007, on which
businesses would have expected relief and which they would have
factored into their calculations and pricings in respect of the work
that they are doing for the retailer, will now have to be written off,
because they will not obtain any tax relief for them. The insurers
object to that element of retrospectivity. Again, it goes back to a
point that I have made in previous sittings. The measure undermines the
certainty of the tax system, because at that point the insurers knew
what the law was and acted in accordance with
it. It
is worth bearing in mind the fact that the principles on
retrospectivity—the Rees rules—were debated in the
Standing Committee on the Finance Bill 30 years ago. Peter Rees, then
an Opposition Treasury spokesman and later a distinguished Chief
Secretary to the Treasury—now a Member of the other
place—set out some parameters on retrospective legislation, and
how it could be used to tackle tax avoidance. He argued that
legislation could be backdated to the point at which a clear warning
was given through either a parliamentary question or a statement. The
point was that, having flagged up that change in the law, it could be
enacted in the subsequent Finance Bill. That principle has since been
observed and followed by Governments of both
persuasions.
The
Rees principle ensures, in effect, in this country businesses are taxed
on the basis of what the law says. However, in respect of the
provision, the ABI has a point, because it is logical to say that
expenses incurred after the PBR should not get tax relief. Life
companies expected that they were going to be relieved in respect of
expenses that have been incurred, but which have yet to be relieved;
that was the basis on which they incurred those expenses and on which
they expected to get tax relief. Paragraph (5) is retrospective in its
application, but it goes beyond what is acceptable under the Rees
principles, because it means that people will not receive tax relief on
legitimately incurred expenses, even though they were to be taxed in
accordance with the law at the time they were incurred. That is why I
tabled amendment No. 92. Although the amendment may be slightly
technically deficient, I am sure that if the Minister is swayed by the
power of my arguments she will come up with a more technically
compliant amendment on Report. Nevertheless, it is important that the
Committee discuss this
matter.
Kitty
Ussher:
If I were swayed by the power of the hon.
Gentleman’s arguments, I would overlook the fact that his
amendment should also remove sub-paragraph (7) technically
to have the effect that I presume was intended. Of course, we could
produce Government amendments to correct that, but unfortunately I am
not swayed by the power of his arguments. I shall explain
why.
5.30
pm
For
the Committee’s benefit, since the hon. Gentleman has explained
the purpose of paragraph (5) of schedule 17, I will not
rehearse that argument, but will just address the points that he made.
I am glad that the hon. Gentleman
mentioned the Conservative Treasury Minister, Peter Rees, who introduced
the Rees rule. I was wondering whether he had purloined my briefing
pack at some point over lunch, because I was intending to use the Rees
rules to make exactly the opposite point. Peter Rees, who is now in the
other place, set out that the fact that if legislation is announced
before a Budget, it should be sufficiently detailed so that people know
where they stand. We believe we have done that through the pre-Budget
report, so the issue of retrospectivity—if that is the word; it
might be retrospectiveness—is not one that we will take from the
hon. Member for Fareham. That,
however, is beside the point. The substantive point that I want to make
concerns the hon. Gentleman’s complaint that the expenditure on
commissions disallowed for tax purposes in 2008 may have been spent up
to six years ago when the company expected to get relief—I think
that we all know which company we are talking about—and that
that expectation should be honoured. There are a number of responses to
be made, but the main point is that there has been no real outlay of
funds by the fronting company to justify a tax relief. The fronting
company is not at risk in any real sense, and its only interest in the
arrangements is a modest fee. The other economic flows arising from the
arrangement net out to zero, so the tax relief on the commissions is,
therefore, a straightforward tax subsidy that should not be
allowed.
We
do not accept that the company is entitled to relief in the first
place. If necessary, we may litigate on the issue if it comes to that.
Courts are not always well disposed to tax schemes that manufacture tax
deductions, when there is no corresponding economic cost. Finally,
simply incurring expenditure on an asset does not guarantee that the
tax treatment of the asset, whether on realisation or amortisation of
the expenditure, cannot be changed in future without being
characterised as retrospective. That is what invariably happens in
relation to capital gains tax, and it is what happened with relief
being denied not from 9 October—the PBR date—but from a
later date that is not before 1 January 2008. Therefore, we believe
that the commencement rules in paragraph (5) are fair and
necessary to stop an unacceptable leakage of tax.
I have
another point on which I would like to tease the hon. Gentleman. If his
amendment were hypothetically passed, it would deprive the Exchequer of
£35 million in the first full year, which I will now add in to
our black hole calculations. [Laughter.] For that reason alone,
I ask the hon. Gentleman to withdraw his
amendment.
Mr.
Hoban:
I did not expect to provoke such hilarity on our
side. I am surprised at the Minister. After last week’s
announcement of a £2.7 billion reduction in tax allowances,
which will be funded from borrowing, she is not in a position to talk
about anyone’s black holes. I thought that she might have held
back from making that sort of comment in the light of her
Department’s predicament.
I do not want
the Minister to think that we condone the scheme. From my perspective,
I can see where the problems arise. If I thought that the scheme was
acceptable, I would have tabled a very different amendment, which would
delete paragraph (5) entirely. I think that the Minister has drawn the
wrong lesson from the Rees rules, which talk about outlawing a process,
or a tax
avoidance scheme, from the day that the rules are announced. What we
have is a situation in which the expenses incurred are based on the tax
law at the time. I would expect the Rees rules to apply to expenses
incurred from the date of the PBR to the date of Royal Assent. I do not
think that the rules should necessarily apply to expenses incurred
before that period. The Minister’s brief on the Rees rules is
very different from my reading of them, so I cannot have purloined that
document over the lunch break. As we spent some of the lunch break
together, it would have been difficult for me to find out about it. I
do not agree with the Minister’s interpretation of the Rees
rules. [Interruption.] The Minister and I had a very enjoyable
time at the financial services lawyers’ AGM. I do not think that
the Minister’s interpretation of the Rees rules is correct, but
I do not particularly want to press the amendment to a vote. I beg to
ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Kitty
Ussher:
I beg to move amendment No. 105, in schedule 17,
page 242, line 28, at end
insert—
‘(2A) In paragraph
(f) of that subsection, after “Scheme” insert “,
or from another insurance
company,”.’.
Most
miscellaneous receipts arising from an insurance company’s life
assurance business are taxable, but if a life insurance company
receives an amount under the financial services compensation scheme to
meet liabilities to policyholders—for example, to meet the costs
of endowment mis-selling—that recovery is not taxed. That is
because, quite rightly, the insurance company gets no tax relief for
the mis-selling costs. However, if the life insurance company receives
a claim under its professional indemnity policy to meet the same sort
of expenses, that recovery would be taxed as a result of changes made
by schedule 17. As there is no policy reason to make that distinction,
we are simply removing it. I hope that that is
clear.
Mr.
Hoban:
I am grateful to the Minister and her officials for
providing a link between the explanatory notes and the amendments. That
has been very helpful. Paragraph 5 of the explanatory notes states that
the relief is available in relation to recoveries from other insurance
companies, but only where they go to meet the cost of fulfilling
obligations to policyholders. Can the Minister clarify what is meant by
the statement—I shall repeat it—that the relief is
available in relation to recoveries from another insurance company, but
only where they go to meet the cost of fulfilling obligations to
policyholders? I shall give an example of a case in which there might
be ambiguity, and I would welcome clarification from
her.
Before
entering the House, I worked for a firm of chartered accountants and
one exercise in which I was involved was the compensating of customers
who had been mis-sold policies. When customers were compensated, one
element of the cost was the compensation itself, but clearly as a
professional firm we charged the costs of that exercise to the
business. Does the definition of costs that the Government expect to be
relieved include any additional costs incurred by the
business—for example, by employing professional firms to help it
to calculate what the loss might be, to verify the process and so
on—as well as the compensation
itself?
Kitty
Ussher:
My understanding is that the answer to that
question is yes, in so far as the costs meet the real cost of
fulfilling the obligation to policyholders, they are
covered.
Amendment
agreed
to.
Kitty
Ussher:
I beg to move amendment No. 106, in schedule 17,
page 245, line 6, leave out sub-paragraph (4) and
insert—
‘(4) Omit paragraph
42 (and the heading before
it).’.
This
is simply a consequential change relating to amendment No.
107.
Amendment
agreed
to.
Mr.
Hoban:
I beg to move amendment No. 91, in schedule 17,
page 247, line 1, leave out from beginning to end of line 43 on page
248.
The
Chairman:
With this it will be convenient to take
Government amendments Nos. 107, 109 and
116.
Mr.
Hoban:
Amendment No. 91 was tabled following the
expression of concerns by representative bodies. They could not
understand why the Government had sought to legislate on the
apportionment of income and gains, as that was subject to a
consultation between the insurance industry and the Treasury which was
not expected to conclude until 2009. The changes set out in paragraph 1
were not discussed with those bodies. They were concerned that the
consultation process, which had hitherto run reasonably well, seemed to
have petered out when the changes were proposed. Amendment
No. 91 would revert to the current basis of
apportionment.
I look
forward to hearing the Minister’s explanation of the Government
amendments in the group. We must be serious about consultation; the
situation shows what happens when it goes wrong. I am sure that when
the Chancellor goes round to see the Association of British Insurers
tomorrow, its representatives will make that point to him. Recent
reforms of life insurance taxation have worked smoothly only when they
have involved consultation with the industry rather than change
announced
unexpectedly.
Kitty
Ussher:
I shall deal with that point immediately. A draft
of paragraph 17 of the schedule was sent to the industry working group
last summer. We received a nil response, so we presumed that it was
okay. Perhaps we should have dragged the group into a room and beat it
out of them, but in the interests of good industry relations, we
decided not to pursue that path. When they saw the Bill, they said,
“Whoops, perhaps there are some issues we want to talk
about.” They then engaged, and we proposed the Government
amendments. In the meantime, I presume that the Opposition tabled
amendment No. 91 as a probing amendment, perhaps as a result of the
same lobbying exercise. At all times, we have sought to engage
constructively.
As the
question asked by the hon. Member for Fareham seemed to relate to the
process rather than the actual amendments, I will leave it there,
unless he would like me to explain the amendments.
[
Interruption.
] I think that the hon. Gentleman
wants me to explain them. After consulting with the industry, we tabled
Government amendments Nos. 107, 109 and 116 as part of the ongoing
process of simplifying the life insurance corporation
tax code. Paragraph 17 of the schedule introduces provisions to clarify
the scope and operation of the rules for dividing the income, gains and
losses of a life insurance company among the different categories of
life insurance
business. As
I said, like most of schedule 17, the provisions were sent some time
ago to the working groups involved in the major and complex
consultation exercise on life insurance taxation. After the publication
of the Finance Bill, the groups made a number of helpful suggestions
about how the provisions could be improved. That is why Government
amendment No. 107 will replace much of paragraph 17 with a revised and
improved version. It will also introduce a new paragraph 17A, which
continues the simplification process. Amendments Nos. 109 and 116 make
minor consequential repeals of obsolete legislation.
Paragraph 17
and the Government amendments will simplify and modernise the rules for
dividing the income and gains of a life insurance company among the
different types of businesses. The changes will not affect how the
division is made, which will be the subject of ongoing discussions with
the insurance industry working group on apportionment. Perhaps that
answers the hon. Gentleman’s
questions.
Mr.
Hoban:
I am grateful for the Minister’s
explanation, but when does she expect the consultation on apportionment
to be
completed?
Kitty
Ussher:
I will be able to answer that question shortly.
The results of the consultation and the report on its conclusions will
be in the 2009 Finance
Bill.
Mr.
Hoban:
I am grateful. I would say to the Minister only
that it is always foolish to assume that a nil reply means assent on
difficult technical issues. I look forward with eager anticipation to
discussing apportionment in next year’s Finance Bill. I am
afraid that we seem to debate life assurance in every year’s
Finance Bill; I hope that the end of the consultation process will mean
that we will no longer be required to do so. However, given the
Minister’s assurances and the fact that the ABI has indicated
that it is pleased that the Government have seen sense, I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Amendment
made: No. 107, in schedule 17, page 247,
line 17, leave out from beginning to end of line 43 on
page 248 and insert ‘carried on by the
company,
(c) income chargeable under Case
V of Schedule D in respect of any overseas property business treated as
carried on by the company under section
432AA,
(d) other income of the
company chargeable under Case V of Schedule
D,
(e) distributions received
by the company from companies resident in the United
Kingdom,
(f) credits in respect
of any creditor relationships (within the meaning of Chapter 2 of Part
4 of the Finance Act 1996) of the
company,
(g) credits in respect
of any derivative contracts (within the meaning of Schedule 26 to the
Finance Act 2002) of the
company,
(h) any income of the
company chargeable under Case III of Schedule D in respect of annuities
and other annual payments within paragraph (b) of Case III of Schedule
D as substituted by section
18(3A),
(i) any credits brought into account by the company
under Part 3 of Schedule 29 to the Finance Act 2002 (intangible fixed
assets), and
(j) any income of
the company chargeable under Case VI of Schedule D, other than profits
of the company chargeable under section 436A (gross roll-up
business).
(1ZB) In subsection
(1)(a) above “losses”
means—
(a) losses in
respect of any separate Schedule A businesses treated as carried on by
the company under section
432AA,
(b) losses in respect of
any overseas property businesses treated as carried on by the company
under that section,
(c) debits
in respect of any creditor relationships (within the meaning of Chapter
2 of Part 4 of the Finance Act 1996) of the
company,
(d) debits in respect
of any derivative contracts (within the meaning of Schedule 26 to the
Finance Act 2002) of the
company,
(e) any debits brought
into account by the company under Part 2 of Schedule 29 to the Finance
Act 2002 (intangible fixed assets),
and
(f) any losses of the
company computed in the same way as profits chargeable under Case VI of
Schedule D, other than any losses of gross roll-up
business.
(1ZC) For determining
as mentioned in subsection (1) above what parts of income or gains
arising from the assets of the company’s long-term insurance
fund are referable to PHI business (to the extent that it would not be
the case by virtue of subsections (1ZA) and
(1ZB))—
(a)
“income” also includes profits shown in the technical
account, and
(b)
“losses” also includes losses so
shown.”
(4) In
subsection (1A), for “, all of the income and gains or losses
referred to in subsection (1) above is”
substitute—
(a) all of
the income and losses referred to in paragraph (a) of subsection (1)
above, and
(b) all of the gains
and losses referred to in paragraph (b) of that
subsection,
are”.
(5)
In subsection (3), after “Income” insert “or
losses”.
(6) After that
subsection
insert—
“(3A)
Amounts falling
within—
(a) section
442A,
(b) section 85(2C) of the
Finance Act 1989, or
(c)
section 85A of that Act,
are
directly referable to basic life assurance and general annuity
business.”
(7) In
subsection (4A), after “Income” insert “or
losses”.
(8) In
subsection (5), for “income, gains or losses” substitute
“income and losses referred to in paragraph (a) of subsection
(1) above, and any gains and losses referred to in paragraph (b) of
that subsection,”.
(9)
In subsection (7)—
(a)
in paragraph (a), for “income, gains or losses”
substitute “income and losses referred to in paragraph (a) of
subsection (1) above, and gains and losses referred to in paragraph (b)
of that subsection,” and insert at the end
“and”,
(b) in
paragraph (b), for “arising from the assets is, and gains or
losses accruing on the disposal of the assets are,” substitute
“and losses arising from the assets, and gains and losses
accruing on the disposal of the assets, are”,
and
(c) omit paragraph (c) and
the “and” before
it.
(10) In consequence of the preceding provisions,
omit the provisions specified in sub-paragraph
(11).
(11) The provisions
mentioned in sub-paragraph (10)
are—
(a) section
432AB(2) of ICTA,
(b) section
502H of that Act,
(c) paragraph
3 of Schedule 11 to FA
1996,
(d) paragraph 19(4) of
Schedule 12 to FA 1997,
(e)
paragraphs 36(1) and (3) and 138(2) and (3) of Schedule 29 to FA
2002,
(f) paragraph 19(4) of
Schedule 9 to F(No.2)A 2005,
and
(g) paragraphs 13(2) and 44
of Schedule 7, and paragraph 5 of Schedule 8, to FA
2007.
(12) The amendments made
by this paragraph have effect in relation to accounting periods
beginning on or after 1 January
2008.
“BLAGAB profits”
etc
17A (1) In section 431 of ICTA
(interpretative provisions relating to insurance companies), after
subsection (2YA)
insert—
“(2YB)
“BLAGAB profits”, in relation to an accounting period of
an insurance company, means the company’s BLAGAB income and
gains for the period reduced (but not below nil) by the
company’s BLAGAB deductions for the
period.
(2YC) “BLAGAB
income and gains”, in relation to an accounting period of an
insurance company, means the aggregate
of—
(a) income
chargeable for the period under Schedule A or Case III, V or VI of
Schedule D so far as referable (in accordance with section 432A) to the
company’s basic life assurance and general annuity
business,
(b) distributions
received in the period from companies resident in the United Kingdom so
far as so referable, and
(c)
chargeable gains so far as so referable accruing to the company in the
period, but (subject to section 210A of the 1992 Act) after
deducting—
(i) any
allowable losses so referable and so accruing,
and
(ii) so far as they have
not been allowed as a deduction from chargeable gains in any previous
accounting period, any allowable losses so referable previously
accruing to the company.
(2YD)
“BLAGAB deductions”, in relation to an accounting period
of an insurance company, means the aggregate
of—
(a) amounts falling
in respect of any non-trading deficits on the company’s loan
relationships to be brought into account in the period in accordance
with paragraph 4 of Schedule 11 to the Finance Act 1996,
and
(b) the expenses deduction
given by Step 8 in section 76(7) for the
period.”
(2) In section
755A(11C) of that Act (treatment of chargeable profits and creditable
tax apportioned to company carrying on life assurance business), omit
paragraph (b) and the “and” before
it.
(3) In section 85A of FA
1989 (excess adjusted Case I profits), for subsections (6) and (7)
substitute—
“(6)
“The relevant income”
means—
(a) the
company’s BLAGAB income and gains for the accounting period (but
excluding any amount within this section),
and
(b) profits of the company
chargeable under Case VI of Schedule D under section 436A of the Taxes
Act 1988 (gross roll-up business) for the accounting
period.”
(4) In section
88 of that Act (meaning of “policy holders’ share of
profits”), for subsections (3) to (3B)
substitute—
“(3) For the purposes of subsection (1) above
the relevant profits of a company for an accounting period consist of
the aggregate of—
(a)
the company’s BLAGAB profits for the period,
and
(b) profits of the company
chargeable under Case VI of Schedule D under section 436A of the Taxes
Act 1988 (gross roll-up business) for the
period.”
(5)
Omit—
(a) section 89(1B)
of FA 1989,
(b) in section
210A(10)(a) of TCGA 1992, “(within the meaning of section 89(1B)
of the Finance Act
1989)”,
(c) paragraph
21(2) of Schedule 8 to FA
1995,
(d) paragraph 2(1) of
Schedule 11, and paragraph 56 of Schedule 14, to FA
1996,
(e) paragraph 6(1) of
Schedule 33 to FA 2003,
(f) in
paragraph 9(2) of Schedule 7 to FA 2004, paragraphs (a) to (c) and the
words from”; and, in consequence of” to the end,
and
(g) paragraphs 58 and 67(2)
of Schedule 7, and paragraphs 15(3) and 16(2) of Schedule 8, to FA
2007.
(6) The amendments made
by this paragraph have effect in relation to accounting periods
beginning on or after 1 January 2008.’.—[Kitty
Ussher.]
5.45
pm
Kitty
Ussher:
I beg to move amendment No. 108, in
schedule 17, page 249, line 11, at
end insert—
‘Group relief: gross
profits to exclude relevant
profits
18A (1) In section 434A of
ICTA (computation of losses and limitation on relief), insert at the
end—
“(4) For the
purposes of section 403, where the surrendering company is an insurance
company which is charged to tax under the I minus E basis in respect of
its life assurance business for the surrender period, the
company’s gross profits of that period do not include its
relevant profits (within the meaning of section 88 of the Finance Act
1989) for that period; and expressions used in this subsection and
section 403 have the same meaning here as
there.”
(2) The
amendment made by sub-paragraph (1) has effect in relation to
accounting periods beginning on or after 1 January
2008.’.
Government
amendment No. 108 arises at the urging of a small representative body.
Its representations were made after the Bill was published, but we saw
merit in them. I shall give some background.
Since 1915,
life insurance companies have been able to set the expenses of
management of their long-term insurance business against the income and
gains of that business. That type of management expense is governed by
insurance-specific rules under section 76 of the Income and Corporation
Taxes Act 1988. In addition, under the Finance Act 2004 a life
insurance company that has any income in its so-called shareholders
fund—assets outside its long-term insurance fund—can set
certain expenses against that income under the general management
expenses rules. If those general expenses exceed a company’s
profits, the excess can be relieved against the profits of other group
companies. That is known as group relief. However, for life insurance
companies, the income and gains of the long-term insurance business are
taken into account in computing the excess despite the fact that those
general expenses cannot be set against those life insurance
profits.
The Government
accept representations from the life insurance industry that that is
unfair. The amendment therefore provides that the life insurance
profits are not taken into account in working out whether there is an
excess of the general management expenses available for group
relief.
Amendment
agreed to.
Amendment
made: No. 109, in schedule 17, page 249, leave out
lines 21 to 25.—[Kitty
Ussher.]
Kitty
Ussher:
I beg to move amendment No. 110, in
schedule 17, page 249, line 35, at
end insert—
‘(2A) In
paragraph 17 (restriction on losses carried forward),
omit—
(a) in
sub-paragraph (3)(b), “or (13)”, “and charges on
income” and “and charges”,
and
(b) in sub-paragraph (4),
“or
(13)”.’.
The
Chairman:
With this it will be convenient to discuss
Government amendments No. 111, 112, 114 and
115.
Kitty
Ussher:
Taken together, the amendments are additional
tidying up measures dealing with the provisions on relief for
remediation of contaminated land as modified for life insurance
companies. They also make tidying up changes in advance of the first
Bill of the tax law rewrite project on corporation tax. They also
correct—God forbid—an error in the Finance Act 2007
(Schedule 9) Order 2008, which needs to be sorted. I could talk about
each amendment in great and lengthy detail, but I will not do so unless
the Committee specifically asks me
to.
Mr.
Hoban:
Perhaps it might help and reduce the amount of
great and lengthy detail if I ask the Minister to clarify the question
of remediation of contaminated land as modified for life insurance
companies; I am not entirely sure that I understand where it fits. I
also wonder why the Government did not made it explicit in amendment
No. 112 that tax relief for R and D does not apply to insurance
companies.
Kitty
Ussher:
Amendment No. 110 deals with relief for the
remediation of contaminated land. It is a minor amendment, so I shall
explain
it.
Paragraph
21 of schedule 17 makes a number of amendments to schedule 22 to the
Finance Act 2001, which is on relief for the remediation of land, in
order to remove obsolete and incorrect references to other tax rules.
However, I am shocked and horrified to have to say that the need to
make such amendments to paragraph 17 of schedule 22 to the 2001 Act was
overlooked. Amendment No. 110 corrects that oversight by removing
references to section 76(13) of the Income and Corporation Taxes Act
1988 and the obsolete concept of “charges on
income”.
I hope that I
have answered the hon. Gentleman’s first question. I ask him to
repeat his second question.
Mr.
Hoban:
My second question was about amendment No. 112,
which implies that an imaginative tax planner
might think of some way in which an insurance company could seek tax
relief for expenditure on research and development. I think that the
amendments make it clear that they cannot. I am intrigued as to how the
insurance industry might have been able to exploit the
relief.
Kitty
Ussher:
I will write to the hon. Gentleman on that point.
I am advised that life companies can get research and development
relief under the large company scheme, but I shall write to him about
the precise
genesis.
Amendment
agreed to.
Amendments
made: No. 111, in schedule 17, page 252,
line 5, at end
insert—
‘Repeal of section 737D of
ICTA
32A (1) In ICTA, omit section
737D (power to provide that manufactured payments are to be treated as
income eligible for relief under section
438).
(2) In consequence of
subsection (1),
omit—
(a) section 83(1)
of FA 1995,
(b) section 139(6)
of FA 2006, and
(c) paragraph
175 of Schedule 1 to ITA
2007.’.
No.
112, in
schedule 17, page 252, line 5, at
end insert—
‘R&D
relief
32B In paragraph 12 of Schedule
12 to FA 2002 (insurance companies treated as large companies), for the
words following paragraph (b) substitute “the company does not
qualify as a small or medium-sized enterprise for the purposes of Parts
1 to 3 of this Schedule or Schedule 20 to the Finance Act
2000.”’.—[Kitty
Ussher.]
Kitty
Ussher:
I beg to move amendment No. 113, in schedule 17,
page 252, line 5, at end
insert—
‘Section 89(7) of FA
1989
32C (1) In section 89(7) of FA
1989 (policy holders’ share of profits), for “in respect
of losses in accordance with section 85A(4)” substitute
“in accordance with section 85A(4) in respect of losses incurred
in an accounting period in which 31 December 2002 is included or any
later accounting
period.”
(2) The
amendment made by this paragraph has effect in relation to accounting
periods beginning on or after 1 January 2008 and ending on or after 15
May
2008.’.
The
amendment corrects an erroneous repeal made by the Finance Act 2007 and
restores the position that only losses originating in an insurance
company’s period containing 31 December 2002 and any subsequent
accounting periods can be carried forward for the purposes of section
89(7) of the Finance Act
1989.
Mr.
Hoban:
I want to raise a concern about the amendment. The
Minister says that it deals with an erroneous repeal in last
year’s Bill, but representations that I have received suggest
that the repeal in last year’s Bill was actually correct and the
repeal this year is erroneous. That sounds a very complicated position
to be
in.
The
amendment relates to a case that has been before the special
commissioners in which it was ruled that the position in law as it was
after last year’s repeal was correct, and that the life company
could carry forward losses for periods ending before 31 December 2002.
That relief is available to all other corporation tax
payers.
With the
amendment, we appear to have a question of policy rather than the
simple undoing of an accidental repeal. On that basis, there is concern
that it should have been subject to the normal level of consultation
and scrutiny rather than simply being treated as a correction of an
accidental
repeal.
The
case involves an insurance company, and the special commissioners found
in favour of the insurer. I understand that the decision is subject to
an appeal in the High Court later this
year.
The
amendment goes slightly beyond correcting an accidental repeal to a
policy decision and actually overrides the decision reached by the
special commissioners. In the light of current litigation, I wonder
whether there should be some proper consultation between the Treasury,
Her Majesty’s Revenue and Customs and the industry as to what
the position should
be.
Mr.
Breed:
I rise to support the hon. Gentleman. I believe
that we have all had a helpful e-mail from PricewaterhouseCoopers, and
I was somewhat surprised that the Government had continued to pursue
the amendment. It seems that at the very least there needs to be some
clarification and discussion with the industry as to exactly what it
does.
It
is not simply a matter of repealing an accidental repeal; it is a
matter of fundamental policy. If we allowed the amendment, we would
lose the possibility of a discussion on that and of the
Government’s taking account of the appeal that is going through.
I hope that the Committee resists the amendment because there is clear
evidence that the Government need to look at the matter further.
Bearing it in mind that the amendment will repeal a measure that they
accidentally repealed last time, it would be double jeopardy if they
repealed a measure that should not have been repealed in the first
place.
Stewart
Hosie:
What will be the implication if the judges find
against the commissioners? Will the Treasury have to introduce
emergency legislation to undo the erroneous repeal from last year?
Given that the case is ongoing, that is a real possibility. If the
commissioners are proved wrong and last year’s repeal was in
fact not erroneous, will the Treasury be forced into emergency changes
later? Would it not be better on that basis to wait until the court
case has been
held?
Kitty
Ussher:
The hon. Member for Fareham implied that there was
some kind of intention behind what we did last year, but that is simply
not the
case.
Mr.
Hoban:
I wish to clarify that. The intention to which the
Financial Secretary referred is in this year’s repeal, not the
problem that arose last year. Last year, according to the judgment of
the special commissioner, the Finance Act 2007 was right. I am
concerned that, actually, the amendment is a poor
decision.
Kitty
Ussher:
I understood the hon. Gentleman, but he is not
correct. It has been suggested that we are now reneging on an intended
policy change. The point is that there was no hint in last
year’s Budget of a package of proposed measures with costs
attached to it that actually came into being.
If we had
intended to make a policy change last year, it would have cost more
than £50 million. We made the change, but it was unintentional,
which is why we are seeking to correct it. The explanatory notes to
last year’s Bill did not suggest that we intended that cost,
which goes to show that we are now simply trying to get to the position
as we thought it was last year. This is not a desirable position to be
in, but I want to make it absolutely
clear—
Stewart
Hosie:
The Minister referred to the measure in last
year’s Budget, the Finance Bill and the explanatory notes. Given
that the Finance Bill made the repeal, is the Government and Treasury
position now that if a measure is not in the Budget, and if it appears in the Finance Bill, they can decide that it was not a good idea and
revert the Budget and repeal the Finance
Bill?
Kitty
Ussher:
I am not making any such point. I am simply saying
that we made a mistake last year that had an unanticipated cost. Had it
been deliberate, the cost would have been part of the explanatory notes
and the Budget process. Some companies have benefited as a result, but
we are not proposing to take the money back off them. We are simply
proposing to go back to the situation that we thought we were in last
year.
Mr.
Bone:
Will the Minister clarify what the Exchequer has
lost because of the error? Is it £50
million?
Kitty
Ussher:
The figure of £50 million would be correct
if we did not make the correction today. I am advised that if we make
the amendment, the overall cost is negligible. The cost would be
£50 million if we did not correct the mistake and if
hon. Members do not support us.
I am aware of
the note that PricewaterhouseCoopers circulated to us and I should like
to explain our response. The PWC briefing says that it is perfectly
proper for accidental repeals to be corrected, which is what we are
doing, and, rightly, that HMRC will no doubt argue that reintroducing
paragraph 7(3) is merely putting the law back to the position it was in
prior to the accidental
repeal.
We
are, of course, arguing that, but it is not just HMRC that is doing so.
That is the Government’s clear position. The Government’s
policy in 2003, in 2007 and today is that the relief for losses carried
forward must be restricted. It is wrong to say, as the briefing does
say, that the accidental repeal was, nevertheless, correct. The
accidental repeal went against the decision of the special
commissioners. I hope that that lays the matter to
rest.
6
pm
Mr.
Hoban:
I am not sure that it does. We emerge from this
slightly more confused than when we started. It would appear from the
note that PWC sent us that the position as it stood in the Finance Act
2007 reflected the law, as the special commissioners found to be the
case. We have some case law here that is very clear that companies
should have been able to carry forward losses that arose prior to 31
December 2002. The special commissioners have been very clear in their
finding about the availability of these losses. To say that this is
merely the reversal of an accidental repeal last year
does not really address the concern that the special commissioners have
ruled on this and it is likely to go further.
There is a
policy decision in that if the special commissioners’ findings
were accepted by higher courts, there would be a loss to the Exchequer
of £50 million. We are looking for a bit more openness and
clarity as to why we should support the amendment. While the mistake
may have been accidental last year, the reality is that the law as it
stands reflects the view of the special commissioners in this case.
Unless the Minister can give us some more reassurance, we may have to
press this to a
Division.
Kitty
Ussher:
I can give the explanation that the hon. Gentleman
requested. It may help the Committee to bear it in mind that there were
two parts to the commissioners’ verdict. They found that relief
for losses was implicit in the pre-2003 rules, but they also said that
the 2002 restrictions and later losses were still valid. So the
commissioners’ verdict affecting the 2003 change is in line with
putting back the restrictions. Perhaps that resolves the
confusion.
Mr.
Hoban:
I am troubled by this. Something that has been
presented to the Committee as a reversal of an accidental repeal seems
to be a bit more fundamental than that, given the special
commissioners’ case. I am also conscious that this has been
drawn to the Committee’s notice at quite a late stage in our
proceedings. I and other hon. Members probably got this yesterday
evening. Personally, I am minded not to oppose the amendment, but I
would like to continue to explore this with a view to tabling further
amendments on
Report.
Amendment
agreed
to.
Amendments
made: No. 114, in schedule 17, page 252, leave out
lines 6 to 8 and
insert—
‘Commencement of Schedule 9
to FA 2007
33 (1) Paragraph 17 of
Schedule 9 to FA 2007 (transfers: commencement) is amended as
follows.
(2) In sub-paragraph
(2), for “9, 10(3) to (5),” substitute
“10(5),”.
(3) In
sub-paragraph
(3)—’.
No.
115, in
schedule 17, page 252, line 14, at
end insert—
‘(4) After
sub-paragraph (4)
insert—
“(4A) The
amendment made by paragraph 9 has effect in relation to contracts
entered into in a period of account beginning on or after 1 January
2008.”
(5) Insert at the
end—
“(6) The
amendments made by paragraph 10(3) and (4) have effect in relation to
assets transferred on or after 1 January
2008.”’.
No.
116, in
schedule 17, page 252, line 29, at
end insert—
‘Repeal of spent
provision
36 In section 88(5) of FA
1989 (policy holders’ share of profits), omit the words after
“January 1990”.’.—[Kitty
Ussher.]
Schedule
17, as amended, agreed
to.
Clause
41 ordered to stand part of the
Bill.
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