I beg to move amendment No. 105, in page 453, line 3, after 'effect', insert
'in the corresponding underwriting year'.
The Chairman: With this we may discuss the following amendments: Government amendment No. 205.
No. 106, in page 453, line 16, at end insert
'and for the purposes of section 172 above shall be treated as a payment made at the time the contract takes effect.'.
No. 107, in page 454, line 5, after 'effect', insert 'in the accounting period'.
Government amendment No. 206.
No. 108, in page 454, line 22, after 'contract', insert
'at the time the contract takes effect'.
Schedule 32 deals with the tax treatment of what tax legislation terms ''quota share contracts'' at Lloyd's, a term that is already defined in the Finance Acts of 1993 and 1994. I understand that these provisions do not affect all the commercial quota share reinsurance contracts that Lloyd's members may enter into, but only specific forms of reinsurance contract under the rules and practices of Lloyd's, such as exeat policies and some estate protection plans.
The first part of the schedule—paragraphs 1 to 5—amends the 1993 Act provisions for individual members of Lloyd's. The second part deals with corporate members as per the 1994 Act, but the two are broadly parallel. As I understand it, the purpose of the schedule in each case is to remedy deficiencies in the original legislation that could have led to Lloyd's members getting too little or too much tax relief when they took out such a policy.
For example, if a Lloyd's member pays a cash call into a syndicate to meet losses, that injection of funds can be expected to reduce the price that he would later have to pay to take out a personal reinsurance policy. However, the cash call is not itself a deductible expense, and if the syndicate's taxable result is not declared before the policy takes effect, the member will get no relief for the amount paid in by way of the cash call.
Conversely, existing legislation could in certain circumstances give too much relief. That could happen, for example, if the syndicate has already declared a loss for tax purposes before the quota share contract takes effect, but has not called the loss from its members. In that case, the Lloyd's member might effectively get relief twice for the same economic loss.
I shall first address amendments Nos. 105 and 107, which go together, and then amendments Nos. 106 and 108. The first two concern the proposed restriction of relief as it applies to contingent contracts. Amendment No. 105 deals with individuals, and amendment No. 107 with corporates.
I shall focus on amendment No. 105. There exist within Lloyd's a number of estate protection plans that are within the scope of clause 85 and schedule 32. These are personal reinsurance polices that are contingent on the death of the underwriting member. As a matter of legal construction, the same issue arises in the provisions dealing with corporate members of Lloyd's, although I am not aware that it is a practical concern, at least at present. The purpose of the amendment is to clarify the operation of the provisions.
Let us take the case of individual members. Paragraph 2 of the schedule provides that the premium under such a policy is wholly tax-deductible if the contract does not come into effect. If the contract comes into effect the deductible amount is restricted by any transferred losses that are declared before that date. The practice at Lloyd's is that members who take out estate protection plans usually pay a premium in the December of one year to cover themselves for events in the following calendar year. For example, the premium paid in December 2002 will purchase cover for calendar year 2003. That gives rise to the practical issue that the premium is tax deductible as an expense in the income tax year 2002-03. Paragraph 2 of schedule 32 might be read as requiring members to wait until December 2003 before they can know by how much the premium is tax deductible for that year. Members cannot know before then whether they will die in circumstances such that the tax deduction will be restricted under the proposed new section.
I am sure that the Government do not intend that members of Lloyds should be unable to make their tax returns for an income tax year until after the following 31 December. The amendment deals with that uncertainty in a practical way by requiring the member to look only at events that occur up the end of the corresponding underwriting year. The parallel amendment for corporate members requires the corporate member similarly to look only at events that occur up to the end of the year. I hoped that the Minister would confirm that that was the intention, although it is not specifically stated. Alternatively, she may acknowledge the problem and say that the Revenue will accept provisional figures, which is not as good as tidying up the matter but would partly deal with it.
I thank the hon. Gentleman for that lucid and helpful exposition. I do not intend to detain the Committee with an exposition of the clause itself. The case for it has been well made by the hon. Gentleman. It corrects defects in the legislation dealing with quota share contracts taken out by Lloyd's members. The hon. Gentleman also made the case for conditional contracts and raised issues that I found persuasive. I do not know whether he wants to hear the good news first or the bad news. The good news is that we accept the case that he makes: the bad news is that we do not accept the precise wording of his amendments, as he may have deduced.
The amendments seek to fix the time by which a deduction may be made for premiums paid by Lloyd's members in respect of quota share contracts. Time here, of course, means the relevant years of assessment for individuals or accounting periods for corporate bodies. Amendments Nos. 105 and 107 cover the case of a conditional contract where the condition is never met and as a consequence, the contract, in the wording of the proposed legislation, never ''took effect''. In that type of case, the legislation as drafted allows a deduction equal to the amount of the premium. Where the condition is not satisfied, existing law would
already allow a deduction for the premium in the year of assessment or accounting period in which it is paid. The provisions of schedule 32 do not alter that.
It is, of course, not possible to know for certain until the period covered by the contract has actually ended whether the contract will take effect. For that reason, the actual amount deductible cannot be determined until that time. However, existing law and practice allow an estimate to be made and a deduction claimed at the time that the premium is paid. When the actual amount allowable is finally determined an adjustment may be made if necessary.
Amendments Nos. 106 and 108 deal with different circumstances: payments of cash by a member to a syndicate to meet expected losses before those losses have been formally declared. The aim of the provisions of schedule 32 is to ensure that relief is available where appropriate for those cash calls. As these amendments rightly identify, while the Bill ensures that relief is available where the necessary conditions are met, it is silent about when the relief is due. We agree that the omission needs to be rectified and we are grateful to hon. Members for drawing it to our attention. However, the wording of the amendment could give rise to ambiguity and so we have tabled our own amendments. I therefore urge the Committee to reject the amendment, which I know the hon. Member for Arundel and South Down tabled in good faith. Perhaps he will withdraw it and accept instead the Government amendments.
I spoke at some length on amendments Nos. 105 and 107, but not on amendments Nos. 106 and 108 because Government amendments Nos. 205 and 206 address the same issues. The issue is providing a timing rule to specify when further relief may be given if a cash call is later deemed to be an amount payable under a share quota contract that was previously lacking. It was not clear from the Financial Secretary's response whether Government amendments Nos. 205 and 206, which I have not seen, will cover the issues raised by amendments Nos. 105 and 107.
The advice that I received is that Government amendments Nos. 205 and 206 will not cover the issues raised by amendments Nos. 105 and 107, but the existing law covers the points that the hon. Gentleman has made. The substance of our amendments will clarify the wording that he proposes and express it in a more structured way. The precise issues about which he is concerned are not matters of substance, and we now have a framework that does the job that he has requested.
I am sorry to be a slight bore, but I am jolly happy about what the Financial Secretary has said in relation to amendments Nos. 106 and 108. However, she said that the legislation is intended to provide what amendments Nos. 105 and 107 seek to achieve. There is an issue, and it would be useful to make it clear on the record that that is what it is all about.
Ruth Kelly: To reassure the Committee and repeat what I said earlier, amendments Nos. 105 and 107 cover conditional contracts in which the condition is not met and as a consequence the contract, in the wording of the proposed legislation, ''does not take effect''. In such a case, the legislation allows a deduction equal to the amount of the premium. Where the condition is not satisfied, the existing law would already allow a deduction for the premium in the year of assessment or accounting period in which it is paid, and the provisions in schedule 32 would not alter that.
Existing law and practice allow an estimate to be made and a deduction to be claimed at the time the premium is paid, which is the particular point to which the hon. Gentleman referred. If he were to refer to section 172 of the Finance Act 1993, he would see the legislation set out there. I hope that I have reassured the Committee that the legislation will do precisely what we have clarified as its intention.
I thank the Financial Secretary kindly for her explicit comments. Her comments and Government amendments Nos. 205 and 206 have addressed the issues that we raised with amendments Nos. 106 and 108, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 205, in page 453, leave out lines 15 and 16 and insert—
'(a) for the purposes of subsection (1)(c)(i) and (3A) above, as an amount payable under the contract, and
(b) for the purposes of section 172, as a payment made at the time the contract takes effect.'
No. 206, in page 454, line 22, leave out from 'treated' to end of line 23 and insert—
', for the purposes of subsections (1)(b)(i) and (3A) above, as an amount payable under the contract at that time.''.'.—[Ruth Kelly.]
Schedule 32, as amended, agreed to.