Clause 15 deals with the situation where there is a transfer of insurance contracts from a UK company to another company that is carrying on the insurance business but does not have a permanent UK establishment, and where the assets, immediately after their transfer, are not part of a fund equivalent to the with-profit fund for the insurance company. Currently, as I understand it, the company to which the business is being transferred will not fall within the tax law definition of an insurance company and the provision that we are looking at prevents the loss of tax in such circumstances. As such, we welcome the provision.
Currently, if the business is transferred to what is deemed to be a non-insurance company and is an exclusively non-profit business, no account is taken of the transferred liabilities’ value as the transfer charge is computed. If the fair value of the assets transferred exceeds the amount brought into the account of the transferor by those transferred assets, this provision will allow the excess, plus the value of certain liabilities transferred, to be treated as an amount brought into account, and the transferor will be taxed accordingly. That is my understanding of the reasons behind this provision, and I would be grateful if the Minister elaborated. If I am correct, we are in favour of the provisions in the clause.
I have a few questions for the Minister. I gather from eye contact and nods from Government Members that the Economic Secretary to the Treasury will be responding. Will she tell the Committee what effect the changes in clause 15 will have on revenues for Her Majesty’s Treasury, given that the clause changes tax liabilities? Have any calculations been done or any predictions been made on what the future revenue stream would be, if the clause was enacted?
Will the hon. Lady also tell the Committee whether there is any verification mechanism or external audit of the fair value of assets calculation being introduced in subsection (10)? On a point of information, will she explain what the significance is of 22 June 2010 in subsection (11)? I look forward to hearing what the Minister has to say, because this is a complex clause. I would appreciate it if she outlined what advantages it would give the UK insurance sector, as well as what impact it will have on revenues.
It is a pleasure to serve under your chairmanship, Mr Chope.
As the hon. Member for Bristol East pointed out, clause 15 modifies the rules that apply when liabilities under long-term insurance contracts are transferred from one company to another. Such a transfer of business will involve not only the transfer of liabilities, but the transfer of assets held to meet those liabilities. The current tax rules are necessary because transferring assets in excess of liabilities could allow taxable profits to escape tax. Current rules, however, do not always give the right result.
The clause attempts to address an unintentional tax charge. A UK company wishing to transfer insurance contracts to a company outside the European economic area, or to an EEA company without a UK permanent establishment, could be taxed more than it should be. As the hon. Lady pointed out, the tax would be on the full market value of assets transferred, without any deduction for the value of the liabilities that the assets are intended to meet.
In addition, the solvency II directive will introduce significant changes to the regulation of insurance companies in 2012. It aims to produce a modernised, risk-based approach to such regulation while ensuring that there is appropriate protection for policyholders. In preparation for that change, insurers are considering whether business that is written in non-EEA countries should continue to be administered, and thus regulated, in the EEA. The prospect of a significant unwarranted tax charge inhibits what should be a commercial decision, which is bad for fostering the insurance business within our country. Accordingly, we are modifying the rules to remove inhibition to making commercial decisions. Critically, however, we are still ensuring that profits cannot escape the UK untaxed.
The rule changes have been made following discussion and full consultation with the life insurance industry. The clause fixes an unintentional tax charge that inhibits commercial transactions.
Let me try to address the points that the hon. Member for Bristol East raised. The revenue will be negligible because there is no scorecard impact. On fair value, the rules will be consistent with those that apply across the rest of the insurance industry, while the date she mentioned is simply the date of the emergency Budget.
The presumption is that fair value is ultimately subject to court approval. HMRC has the ability to test the measure using actuarial accounting advice, which is broadly consistent with how the matter will be approached within the rest of the insurance industry.
I wonder whether any analysis of possible costs has been carried out. If actuaries are involved and there is a possibility of legal challenge, which could ultimately be settled in the courts, HM Treasury could incur substantial costs.
Such costs would be minimal because we have well-established methods of assessing fair value. I have set out how HMRC can play its role in benchmarking whether that fair value seems reasonable. We do not expect a significant cost. The provision will correct an anomaly in the current system that we want to remove, and I hope that I have answered the hon. Lady’s questions.