Written evidence submitted by the Association
of British Insurers
1.1 The UK insurance industry is the third largest
in the world and the largest in Europe. It is a vital part of
the UK economy, managing investments amounting to 24% of the UK's
total net worth and contributing the fourth highest corporation
tax of any sector. Employing over 275,000 people in the UK alone,
the insurance industry is also one of this country's major exporters,
with a fifth of its net premium income coming from overseas business.
1.2 The interests of the ABI's members are primarily
around the Scottish Affairs Committee's question: what are
the fiscal and financial implications of the provisions in the
Bill for Scotland?
2. EXECUTIVE
SUMMARY
2.1 There are a number of issues arising
out of these fiscal proposals that directly and indirectly affect
the savings products insurers offer their customers, as well as
insurers as employers and the administrators of pensions, annuities
and other savings products. There will also be an impact on insurers'
customers. The key concern for ABI members is the responsibility
for identifying and tracking Scottish Income Taxpayers ("SIT-payers").
This affects them as UK employers and payers of annuities (to
which the Pay As You Earn ("PAYE") system applies) and
as providers of pensions savings (on which they operate tax relief
at source).
2.2 As HMRC have the information to identify
SIT-payers (whilst insurers and pensions providers do not), the
ABI believes it is right that HMRC is responsible for this on
a transitional and ongoing basis. This will be the best outcome
for the customer and the industry. Requiring insurers to gather
customers' information to identify whether they are SIT-payers
would lead to:
— Increased
burden on customers. Currently, customers
are not responsible for updating their insurer on their tax status.
If the HMRC were not to take responsibility for identifying and
tracking SIT-payers on an ongoing basis, companies would have
to rely on their customers to inform them of their tax status.
As an indication, insurers already struggle to get confirmation
of scheme members' addresses, let alone their tax status.
A significant amount of customer
communication and marketing would be required to make people aware
that they would now be responsible for updating their insurer
with their correct tax status. This would add to the significant
costs already involved.
— Increased
cost to consumers. The costs of the systems
changes required would inevitably be passed on to customers.
2.3 HMRC has distinguished between PAYE and relief
at source. HMRC has indicated that they will have responsibility
for PAYE and payroll matters. It has provided no similar reassurances
for relief at source for pensions where possible solutions are
tied up with the issue of the rate at which relief will be given
on pension contributions.
2.4 The ABI will be seeking clarification from
the UK Government on the intended responsibilities of HMRC. The
ABI and its members will be arguing strongly for HMRC to take
on these responsibilities on an ongoing basis to avoid additional
costs and burden to the industry's customers. More detail on implications
for pensions, tax and savings and other tax issues can be found
below
3. PENSION ISSUES
3.1 Relief at source
As stated in the introduction it is currently Government's
view, which is in accordance with HMRC's Scottish Variable Rate
("SVR") proposal, that pension contributions made by
Scottish taxpayers should attract relief at the SIT marginal rate.
This option would give SIT-payers tax relief at a rate appropriate
to them and preserve the current net pay arrangement but is accompanied
by additional costs and administrative burdens to Scheme operators
who will need systems capable of applying relief at source at
different income tax rates. There is also the issue, already referred
to, of identifying SIT-payers on a timely basis. Alternatively
the approach could be to maintain the status quo and collect net
of the standard UK basic rate of tax. Any subsequent adjustments
should then be made between the members and HMRC.
3.2 Grossing up of contributions
The identification of Scottish taxpayers and the
notification of this information is critically important to insurers
who operate pension tax relief at source. Currently Schemes, on
receipt of a contribution, gross it up and credit it to the member's
arrangement straight away, and claim the tax relief from HMRC
later. They will not necessarily know at what rate to gross up
the contribution. Schemes would need information on a member's
tax position before they make a relief at source claim. We propose
that this task is undertaken by HMRC.
3.3 Deduction of tax from pension annuity
payments
Insurers are particularly concerned with this issue
as they are major annuity providers applying PAYE to annuity payments.
The issues here are similar to those for employers generally who
operate PAYE—the costs and timeframes for updating systems
to handle the Scottish Income Tax and the identification of those
who must pay the Scottish Income Tax. For the reasons given above
we believe the identification must be the responsibility of HMRC.
3.4 Pension tax charges
There is uncertainty as to whether the rates that
pension tax charges are set at (such as the unauthorised payment
charge) would be different in Scotland, or whether the annual
allowance charge to come in from 2011 would be charged at different
rates depending on location.
3.5 Costs
A key cost would be mitigated if HMRC undertake the
task of identifying and subsequently tracking SIT-payers and notifying
this information to Scheme operators. Apart from this, extra costs
will be incurred relating to cost of system changes (i.e. enabling
systems to cope with multiple rates of tax), the cost of material
notifying changes to current Scheme members and marketing material
for future customers.
3.6 Forecasts
Pension forecasts would be more difficult because
of the added uncertainty over tax rates applying in the future.
3.7 Fairness
It is recognised that if the Scottish rates were
lower than the rest of the UK, Scottish taxpayers would have to
pay more from their taxed income to achieve the same amount of
pension saving as a scheme member elsewhere in the UK but this
is balanced by the fact that members would receive a higher post
- tax income provided they retain their Scottish residence on
retirement.
3.8 Appropriate Personal Pensions
An issue arises in respect of HMRC contributions
to personal pension schemes of individuals contracted out of S2P
if the SIT is different to the UK basic rate. We believe that
this will be an issue of declining importance after 2015-16 as
contracting out on a defined contribution basis ends from April
2012.
3.9 HMRC's SVR proposal was that HMRC should
make up any minimum contribution to the SVR / SIT where the employee
is liable at that rate, with HMRC being reimbursed by the Scottish
Parliament for any additional expenditure incurred where the SVR
/ SIT is higher than the UK basic rate.
4 TAX AND
SAVINGS
4.1 General observations
The Scotland Bill as currently drafted will not extend
the SIT to savings income. Whilst life policies do not generate
income, many life companies are part of a financial services group
that would include, for example, a fund management business. Deducting
tax from fund income distributions at different rates depending
on residence would be costly to implement and to maintain. We
agree that the SIT should not apply in these circumstances.
4.2 Capital gains tax
The Scotland Bill as currently drafted will tax personal
capital gains at UK rates. "The rate of corporation tax
on a policy holder's share of capital gains of Life assurance
companies and Friendly Societies". Currently this is
linked to the UK basic rate of income tax. If Life assurance companies
and Friendly societies do not fall within the definition of "Scottish
taxpayer" then the UK basic rate should still apply to this
rate of tax. HMRC's SVR proposal was that the UK basic rate of
tax would continue to apply to this rate of tax.
4.3 If it were necessary to tax policyholder
income and gains at different rates depending on the individual
policyholder's residence this would not be possible with current
systems. Income and capital gains would have to be traced and
separated at individual policy level and the appropriate rate
of tax applied. If this was imposed it would require extremely
costly system changes or indeed completely new systems. We therefore
agree that continuing to apply the UK basic rate is appropriate.
Furthermore, as gains on life policies are included as savings
income within the Bill these gains should continue to be taxed
at UK personal tax rates.
4.4 Partnerships
Under self assessment, the individual partners are
liable to tax on their own share of the partnership's income.
Where a partner is a Scottish taxpayer, such income will potentially
be subject to the Scottish tax.
4.5 Trusts and personal representatives
Trusts and estates of deceased persons have a residence
for tax purposes. There are different rules for each and different
rules for income tax and capital gains. The introduction of "Scottish
residence" would add further complexity to this for trustees
and personal representatives.
4.6 Furthermore the interaction rate of tax payable
by trusts on their income and gains (where applicable) and the
rate of taxation of that income in the hands of beneficiaries
(who going forward may be Scottish taxpayers) will need to be
clarified (particularly in mind here the reclaim, or "topping
up", of income tax suffered at source in the trust and subsequently
distributed to the beneficiary).
4.7 Income from which tax is currently deducted
at source
The issue is how the introduction of the Scottish
tax will impact on the current uniform UK rate of deduction (including
the tax liability recipients of such payments). This issue includes:
(i) Payments to sub-contractors.
(ii) Payments of certain annuities and royalties.
(iii) Charitable covenants and Gift Aid.
(iv) The scheme for payments to non-resident
landlords.
4.8 We assume the annuities referred to in (ii)
above are non-pension annuities eg purchased life annuities. If
that is so then we would regard that as savings income and hence
not subject to the SIT rate. In the hands of the recipients the
HMRC's SVR proposal was that this income should continue to be
taxed only at UK rates and The Scotland Bill would also seem to
tax this at UK rates as saving income. The exception to this general
proposal is retirement annuity contracts, where to ensure consistency
with the tax treatment of other types of pension payments (see
above), the SIT rate will apply per the current drafting of The
Scotland Bill.
4.9 Interest relief for loans to buy life
annuities (home income plans)
Relief is currently given at UK basic rate. Issues
for borrowers and plan administrators would arise if there was
a differential between the Scottish rate and the UK rate. HMRC's
SVR proposal was that relief at the UK basic rate should continue
to apply to all borrowers.
5. OTHER TAXES
5.1 A number of other taxes are devolved under
the Calman proposals:
(i) Stamp Duty Land Tax.
(ii) Landfill Tax.
5.2 The ABI has no particular comments on these
taxes. The Scotland Bill allows for the prospect of introducing
new taxes to become devolved to the Scottish Parliament. We note
that this would be subject to appropriate scrutiny by the UK Parliament.
January 2011
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