Tax treatment of participants in offshore funds
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 Majestys 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.
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 years 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 years Finance Bill, and that it is not the Governments 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.”
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
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 todays debate. Broadly speaking, we may need to make adjustments to offshore fund systems to reflect the modernisation changes, but because we are working in tandemshoulder to shoulderwith 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
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 estimatedit 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. Gentlemans 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.
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 businessfor example, the commission it pays to the person who refers the business to themthat 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 hasin my interpretation, with a sense of reluctanceaccepted 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
It is worth bearing in mind the fact that the principles on retrospectivitythe Rees ruleswere 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 Treasurynow a Member of the other placeset 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. Gentlemans 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.
For the Committees 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
That, however, is beside the point. The substantive point that I want to make concerns the hon. Gentlemans 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 reliefI think that we all know which company we are talking aboutand 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 Octoberthe PBR datebut 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 weeks 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 anyones black holes. I thought that she might have held back from making that sort of comment in the light of her Departments 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
Amendment, by leave, withdrawn.
(2A) In paragraph (f) of that subsection, after Scheme insert , or from another insurance company,..
Most miscellaneous receipts arising from an insurance companys life assurance business are taxable, but if a life insurance company receives an amount under the financial services compensation scheme to meet liabilities to policyholdersfor example, to meet the costs of endowment mis-sellingthat 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 statementI shall repeat itthat 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 businessfor example, by employing professional firms to help it to calculate what the loss might be, to verify the process and so onas 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.
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 Ministers 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
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. Gentlemans questions.
Mr. Hoban: I am grateful for the Ministers 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 years Finance Bill. I am afraid that we seem to debate life assurance in every years 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 Ministers 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 companys 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,
(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 companys BLAGAB income and gains for the period reduced (but not below nil) by the companys 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 companys 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 companys 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 companys 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 companys 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.
(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.]
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 companys 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 fundassets outside its long-term insurance fundcan set certain expenses against that income under the general management expenses rules. If those general expenses exceed a companys 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.]
(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 correctGod forbidan 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. Gentlemans 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
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
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.]
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 companys 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 years Bill, but representations that I have received suggest that the repeal in last years 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 years 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 Majestys 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 Governments 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 years 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 years 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 years 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 years 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 years 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 Governments clear position. The Governments 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.
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
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 Committees 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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