Schedule 17
Finance Bill
5:12 pm
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.