Schedule 9 - Insurance companies etc
Finance Bill
10:15 am
Mark Field (Shadow Minister, Treasury; Cities of London and Westminster, Conservative)
The poor Economic Secretary was wondering what would happen, and whether he would have to read the same notes twice, or amalgamate them. I knew that I would have your approval, Mr. Cook, on that basis that the arrangement would save time. We will get down to business.
Amendment No. 109 would leave out the Government's proposed insertion of new section 444ACA into the Income and Corporation Taxes Act 1988. In its place, we seek to insert amendment No. 110, which should have the same effect of closing down the tax planning that the Government, reasonably, wish to prevent. However, we want to avoid the unwarranted tax charge in what are regarded as innocent transactions, and to remove a taxation anomaly in the life assurance tax laws. In short, we believe that the amendments represent a far more straightforward way of moving in the direction that the Government have in mind.
The Economic Secretary will be aware that life assurance companies have two types of investment as subsidiaries held from their long-term funds: other insurance companies, and companies that are holding investment assets, such as property or bonds. Section 83(2) of the Finance Act 1989 currently taxes, in the parent life assurance company, any increase or decrease in the regulatory value of the subsidiary. That has certain unintended consequences, namely that life assurance groups have sought to obtain substantial tax deductions for the write-down in solvency value of such subsidiaries acquired intra-group when there is no equivalent commercial loss. That is normally because the certificate may be held in a long-term fund for a short period prior to a subsequent transaction—for example, because the subsidiary business will shortly be transferred to its parent.
Another unintended consequence is that there is potential for double taxation, as income and gains in the subsidiary are taxed and the resulting increase in value or dividend from the subsidiary would be taxed again, also at 30 per cent., in the parent life assurance company, which would mean an effective tax charge on such income of 51 per cent.—30 per cent. plus 30 per cent. on 100 per cent. minus 30 per cent. tax.
The quantum of the tax charge that arises from someone undertaking the planning will not equal the deduction that the Government wish to prevent, as one is based on fair value and the other on admissible or regulatory value, and the two are not the same.
We hope that our amendment will remove the double tax anomaly and prevent the structured transactions designed, owing to the difficult wording of section 83(2) of the Finance Act 1989. We hope that we can secure some assurances from Ministers that paragraph (8) does not go any further than closing down the abuse at which it is aimed.
The industry's concern with the existing wording is that shares in the transferor may generally be held in the transferee's long-term fund, to facilitate the part VII business transfer that is contemplated. Given that part VII transfers of businesses, other than those already heavily into run-off, are estimated to cost approximately £10 million in time and costs, not to mention the major drain on management time, no company will wish to undertake such a transfer solely for tax planning purposes. The costs in management and other time are colossal and it will not be used entirely as a tax planning vehicle.
Among the other concerns of the industry, it feels that as part of that transfer there is bound to be a fall in value in the shares of the transferor, as it is effectively reducing its surplus assets by way of a distribution. The rules require that an amount equal to that reduction in fair value is taken into account as a receipt under section 83(2) of the 1989 Act. That section brings into the charge to tax investment the return for life assurance computations, which, as the Minister will know, is calculated by a determination of the shareholder profit to be taxed at 30 per cent., and the taxable profits that shareholders make on writing pensions, overseas, individual savings account and life reassurance business.
The deemed receipt is aimed at negating tax planning. We accept that that is a desirable and acceptable objective by obtaining a tax deduction for the write-down in value of the subsidiary, which does not match an economic loss. The Association of British Insurers has also indicated that it recognises and agrees with the general principle that there should be an anti-avoidance measure in that instance. However, there is a concern—although much will depend on interpretation—that that section is too far cast and would potentially cover a number of transactions and a number of classes of transaction that are not immediately envisaged.
The concern is that where more assets than liabilities are transferred, as should be the case for a solvent insurance company, there will be a reduction in the fair value of the transferor and a charge in the transferee equal to that fair value reduction. That could cause problems, because if an asset is already held in the long-term fund, any write-down prior to 2003 was probably not taken into account and the amount of any write-down would not be determined by reference to fair value, but by reference to regulatory admissible value.
There is technical flaw in the clause. The amount of any tax deduction obtained in the transferee for a write-down is unlikely to equal the fair value adjustment which will be taxed on the transferee.
I have covered quite a lot of ground. The ABI has been in touch with the Minister in relation to this matter. In summary, its concern is that the clause provides that where there is an excess of assets over liabilities in a business transfer any subsequent trading loss arising in the transferee should be reduced by the amount of the new capital introduced. The Government believe that that should apply even where the reason for the loss has no connection with the transfer, which will, in effect, treat any loss made after the business transfer as if it were artificially created for avoidance purposes. That is not a sensible way forward.
It being twenty-five minutes past Ten o'clock, The Chairman adjourned the Committee, without Question put, pursuant to the Standing Order.
Adjourned till this day at Two o'clock.