Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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.

Jimmy Hood (Lanark & Hamilton East, Labour)

With this it will be convenient to take Government amendments Nos. 107, 109 and 116.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

I am grateful for the Minister’s explanation, but when does she expect the consultation on apportionment to be completed?

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

I beg to move amendment No. 108, in schedule 17, page 249, line 11, at end insert—

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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)”.’.

Jimmy Hood (Lanark & Hamilton East, Labour)

With this it will be convenient to discuss Government amendments No. 111, 112, 114 and 115.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

I beg to move amendment No. 113, in schedule 17, page 252, line 5, at end insert—

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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.

Colin Breed (Shadow Minister, Treasury; South East Cornwall, Liberal Democrat)

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 (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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 (Spokesperson (Economy; Home Affairs; Treasury; Women); Dundee East, Scottish National Party)

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 repeals the Finance Bill, they can decide that it was not a good idea and revert the Budget and repeal the Finance Bill?

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Peter Bone (Wellingborough, Conservative)

Will the Minister clarify what the Exchequer has lost because of the error? Is it £50 million?

Kitty Ussher (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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 (Economic Secretary, HM Treasury; Burnley, Labour)

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.

Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)

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.