Schedule 9 - Insurance companies etc
Finance Bill
9:15 am
Mark Field (Shadow Minister, Treasury; Cities of London and Westminster, Conservative)
Thank you so much for allowing us to move on to amendment No. 105, Mr. Cook. I am somewhat disappointed, however, because I have some notes on amendment No. 104 that I want to touch on, not least because the two amendments are similar. Having stopped in mid-sentence on Tuesday afternoon, the hon. Member for Eastleigh (Chris Huhne), the spokesman for the Liberal Democrats, is not here to continue his remarks. [Interruption.] My hon. Friend the Member for West Suffolk (Mr. Spring) suggested from a sedentary position that the hon. Gentleman might be sorting out his tax credits. It is good to see that some of the greatest brains in the Liberal Democrat party are well organised in such matters, even if it is only for their own affairs rather than elsewhere.
I turn now to business. Time is tight both this morning and this afternoon if we are to get through the remainder of the Bill by 6 o'clock this evening. Amendments Nos. 105 and 106 would affect insurance companies. The Government's plans are set out in schedule 9, which is associated with clause 42. It will come as no surprise to the Economic Secretary to hear that we have had substantial assistance on this highly technical subject from the Association of British Insurers. Although we are not the mouthpiece of any lobbying group, the ABI has expressed legitimate concerns that we feel should be put on record and debated.
As ever, we are keen to tease out from the Government the precise scope of the proposed changes, because it is clear that, in determining the likely outcome and economic effect of the proposed changes, interpretation will be the key. We Opposition Members also worry that the attractions of saving may be undermined at a time when there is a need for higher levels of private saving and more responsibility on such matters.
As the Minister will be aware, the ABI represents some 400 UK insurers. About 95 per cent. of UK business is handled by ABI members; that amounts to some 20 per cent. of investments in the London stock market. As I know from my constituency, insurance may seem to be based in London EC3; however, it must be said that the term covers savings, pensions and health, life, motor and household insurance, and insurance is a large-scale employer in many of our constituencies.
We accept that the insurance industries should pay a fair level of tax, however ''fair'' is to be defined, but the concern has been expressed that a number of proposals in the Bill are unfair to the industry and—to the extent that that will have an impact on policyholders—likely to be unfair to customers, too. That will reduce the attractions of saving, as I said. Our underlying concern is that Government policy on the taxation of life insurers is by no means coherent. The industry acknowledges that a review of key elements of life tax legislation should be undertaken, with a view to introducing measures in the Finance Bill of 2006, at the earliest. But despite that acknowledgment, there are still some ad hoc changes proposed in the schedule that may have wider commercial effects and raise wider issues.
In its representations, the ABI welcomed the Government's agreement to the introduction of a two-year sunset clause under proposed clause 431A of the Income and Corporation Taxes Act 1988, and to that extent I am confident in what the Government have tried to achieve.
Amendments Nos. 105 and 106 are alternatives. Paragraph 3 of the schedule inserts new section 431A into the 1988 Act, and it introduces a power allowing the Government to alter matters of critical importance to the taxation of life insurance by regulation, rather than through primary legislation. That issue was brought up on Tuesday afternoon. In particular, our concern is that the power allows the Government to change the basis on which income and gains are apportioned between different types of business, and between shareholders and policyholders. It also allows them to change the rates of tax that are sufferable.
It must be noted that there are no limits to what the Treasury can include in the secondary legislation. That potentially gives far too much power to the Inland Revenue and too little protection to the taxpayer. Also, the draft regulations contain no sunset clause to limit the duration of the powers. Those rules will need to be reviewed in next year's Finance Bill in nine months' time. We seek an explanation from the Government on whether the proposed changes should be introduced by statutory instrument and whether limitations should be placed on what is in such an SI.
It is incontrovertible that the lack of parliamentary scrutiny or consultation is likely to result in badly thought-out or inequitable proposals becoming law. It is in no one's interests for that to happen, and for the law to be overturned in a matter of months at the next opportunity, which would be under a subsequent Finance Bill.
It is essential that the Government explain some of their reasoning. In particular, why do they believe that it is appropriate for such matters to be dealt with in secondary legislation? How will the Economic Secretary ensure proper scrutiny of Inland Revenue written legislation, and why are the Government introducing legislation that will affect the first quarterly instalment in this tax year after that instalment has already been paid? Surely, if the law needs to be changed, that should be done at the beginning of the 2006 accounting period, or even at the start of the 2007 one, if it is to be delayed until it has had full consideration in next year's Finance Bill. It could be brought into being with the other apportioned rules, which apply for a life assurance company.
Amendment No. 106 has been tabled in case amendment No. 105 is not agreed to. Amendment No. 105 would delete most of new section 431A. Amendment No. 106 is an alternative that could be put in place. It seeks to prevent the Inland Revenue and Her Majesty's Treasury being given powers that they can use to levy a charge on excess assets held within a with profits fund. That was touched on in some detail on Tuesday afternoon's sitting and I do not want to go into torturous detail about it now. However, it seems to us that the intention of the proposed statutory instrument was to levy a 30 per cent. tax charge on investment return on those assets. Such a charge would have mostly fallen on with profits fund policyholders and on shareholder ''profits'' that were far from being realised.
As the hon. Member for Eastleigh pointed out, the latest draft regulations—of 17 June—restrict the charge to what are described as ''excess assets''. The term ''excess'' refers to assets that, after obtaining regulatory approval and paying sufficient compensation to the with profits policyholders, have been extracted from the with profits fund, but remain held in the long-term fund, which is normally called attributed estate or attributed orphan estate.
Investment income and gains on that sort of fund under existing rules still benefit partly from the exemption of tax on investment return for pension business, and would normally be taxed at 20 per cent. rather than 30 per cent. It is important to stress—the lobbying that we received supported this point—that the attributed estate is often used to provide crucial capital support to a life assurance company's long-term fund. There are restrictions about how much of it can be taken into shareholder funds.
This area of taxation is extremely complex. The life assurance industry and tax advisers remain concerned about the lack of knowledge and debate of the ABI's or taxpayers' commercial concerns They have not managed to get this issue addressed. Things would not be like for like in the way in which the excess assets are dealt with from one company to another. There is potential for a punitive taxation effect.
We have had a chance to put these matters on the record. We have debated amendment No. 104, which was a similar amendment, during Tuesday afternoon. I hope that, on that basis, the Minister will at least be able to give us some guidance about what he intends to do.
We also have a concern about the double charge that can arise following implementation of the statutory instrument. Much of this will arise in relation to amendment No. 107, which we will discuss later. Therefore, I will not make too much of this point at the moment, but I hope that the Minister will have some words that will allow us to assuage the concerns of which we have been made aware.