Schedule 33 - Insurance companies

Finance Bill – in a Public Bill Committee at 7:45 pm on 20th May 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 7:45 pm, 20th May 2003

I beg to move amendment No. 142, in

schedule 33, page 376, line 8, after '(d)', insert 'subject to subsection (2E),'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 145, in

schedule 33, page 376, line 8, at end insert

'to the extent that it would be taxable under Schedule D Case I if received by any trading company in respect of a trade other than life assurance business.'.

Amendment No. 137, in

schedule 33, page 376, line 11, after 'assets', insert 'or other expenditure'.

Amendment No. 133, in

schedule 33, page 376, line 20, after '444AC(2)', insert 'or section 444AF(2)'.

Amendment No. 143, in

schedule 33, page 376, line 29, at beginning insert 'Subject to subsection (2F),'.

Government amendments Nos. 159 to 161.

Amendment No. 147, in

schedule 33, page 376, line 44, leave out 'the' and insert 'a'.

Government amendment No. 162.

Amendment No. 148, in

schedule 33, page 376, line 45, leave out 'the' and insert 'that'.

Amendment No. 144, in

schedule 33, page 377, line 2, at end insert—

'(2E) Subsection (2)(d) shall not apply to any amount to the extent that is satisfies the conditions—

(a) that it would not have been taken into account under subsection (2) but for the amendment by the Finance Act 2003; and

(b) that it arises by reason of compliance with an obligation imposed by one or more of the following—

(i) a transaction carried out before 23rd December 2002 (including a transfer of business sanctioned by the Court prior to that date)

(ii) a transaction carried out at any time for the purposes or in connection with such a transaction.

(2F) Subsection (2B) shall not apply to a transfer of an asset made pursuant to an obligation imposed by one or more of the following—

(a) a transaction carried out before 23rd December 2002 (including a transfer of business sanctioned by the Court prior to that date)

(b) a transaction carried out at any time for the purposes or in connection with such a transaction.

(2G) Where the terms of a transaction carried out before 23rd December 2002 are varied after that date so as to impose, in relation to any matter relevant to paragraph (d) of subsection (2) or to subsection (2D), obligations which are significantly different from those which existed prior to the variation, then—

(a) in a case where the matter is relevant to paragraph (d) of subsection (2), the transaction shall be deemed for the purposes of subsection (2E) not to have been carried out before 23rd December 2002; and

(b) in a case where the matter is relevant to subsection (2D), the transaction shall be deemed for the purposes of subsection (2F) not to have been carried out before 23rd December 2002.'.

Government amendment No. 163.

Amendment No. 138, in

schedule 33, page 377, leave out lines 15 and 16.

Amendment No. 139, in

schedule 33, page 377, leave out lines 22 to 24.

Amendment No. 149, in

schedule 33, page 377, line 32, leave out from beginning to end of line 5 on page 380.

Amendment No. 150, in

schedule 33, page 382, line 39, leave out from beginning to end of line 12 on page 383.

Government amendment No. 165.

Amendment No. 134, in

schedule 33, page 392, line 36, at end insert—

'444AF: Transfers of business: modifications of s.83(2)

(1) This section applies where there is a relevant transfer, under a scheme, of the whole or any part of the business carried on by a mutual insurance company (''the mutual'') to a company which has share capital (''the acquiring company'').

(2) In any accounting period of the acquiring company section 83(2) shall apply to so much of the amount brought into account as other income by that company as represents the accrued mutual value, but only as it would have applied before the amendments made by the Finance Act 2003, and if the requirements of subsections (4) and (5) below are satisfied in relation to the shares of a company (''the issuing company'') which is either—

(a) the acquiring company; or

(b) a company of which the acquiring company is a wholly owned subsidiary.

(3) For the purposes of this section the accrued mutual value is the fair value of the assets of the mutual immediately before the relevant transfer less the value of the liabilities of the mutual ascertained as at that date in accordance with section 5 of the Prudential Sourcebook (Insurers).

(4) Shares in the issuing company must have been offered, under the scheme, to at least 90 per cent. of the persons who immediately before the transfer are members of the mutual.

(5) Under the scheme, the majority of the shares in the issuing company which were in issue immediately after the transfer was made, other than shares which were issued pursuant to an offer to the public, must have been offered to the persons who (at the time of the offer) were—

(a) members of the mutual;

(b) persons who were entitled to become members of the mutual; or

(c) employees, former employees or pensioners of the mutual or of a company which was a wholly owned subsidiary of the mutual.

(6) For the purposes of this section, a company is a wholly owned subsidiary of another person (''the parent'') if it has no members except the parent and the parent's wholly owned subsidiaries or persons acting on behalf of the parent or its wholly owned subsidiaries.

(7) In this section—

''contract of insurance'' has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;

''employee'', in relation to a mutual insurance company or its wholly owned subsidiary, includes any officer or director of the company or subsidiary and any other person taking part in the management of the affairs of the company or subsidiary;

''insurance business transfer scheme'' has the same meaning as in Part 7 of the Financial Services and Markets Act 2000;

''mutual insurance company'' means an insurance company carrying on business without having any share capital;

''pensioner'', in relation to a mutual insurance company or its wholly owned subsidiary, means a person entitled (whether presently or prospectively) to a pension, lump sum, gratuity or other like benefit referable to the service of any person as an employee of the company or subsidiary.

''relevant transfer'' means a transfer from a company to another person of business consisting of the effecting or carrying out of contracts of insurance which is effected under an insurance business transfer scheme.

(8) The Treasury may by regulations amend subsection (4) above by substituting a lower percentage for the percentage there mentioned.

(9) The Treasury may by regulations provide that any or all of the references in subsections (4) and (5) above to members shall be construed as references to members of a class specified in the regulations; and different provision may be made for different cases.

(10) The power to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I have only had the chance to look in insufficient detail at the Government's amendments, some of which will address some of our points. I should be grateful if the Economic Secretary would indicate that when he speaks to the Government amendments.

Several areas of the Bill treat life insurance offices in what I think is viewed as an inequitable manner compared with other trading companies, which will place further financial pressure on an industry with problems. Those areas include the taxation of loan funding, the denial of relief for trading losses and the removal of the trading link to the taxation of receipts in trading computations.

A number of changes have been made to the draft legislation published in January, some of which were welcome, but there remain concerns where it appears that no account has been taken of the consultations and representations that were made. The changes are considerable, and I ask the Economic Secretary why no regulatory impact assessment was carried out to assess the implications of the Bill. An assessment of the impact is clearly necessary, especially given the wide-ranging nature and application of the many provisions. As well as the tax impact, the cost of the IT changes required by the bed-and-breakfasting provision could be significant.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 7:59 pm, 20th May 2003

Order. Another Division is taking place in the Commons. I have given this matter considerable thought over the past two minutes. I have been in the Chair for five and a half hours now and two and a half hours this morning, making eight hours. Unless the Government rule that consideration be now adjourned, I intend to suspend the sitting for one and a half hours to enable people to have a meal and a rest and perhaps to attend to matters that they have not been able to deal with. We will come back at half-past nine.

Sitting suspended.

On resuming—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 9:30 pm, 20th May 2003

It is almost like old times. Those of us who have been here for a few years are quite used to sitting late, but I am sure that we will not make a habit of this. I am confident that the Committee is about to make fairly rapid progress. We were dealing with schedule 33, to which the lead amendment is No. 142. We will find it convenient to take the Government and other amendments with it.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

On a point of order, Sir Nicholas. I apologise for dashing in when you are on your feet, but I was anxious to be here right at the start. You rightly said that you hoped that we should not make a habit of this, or be here longer than necessary. It is important to put it on the record that the Opposition have worked very hard today not to inconvenience you by dragging you back at this time of night. I do not believe that any accusation that we have wasted time holds water. We made the point on the Floor of the House that there was not enough time for the Committee stage. We have made the point here that there is not enough time.

It appears that the Government are determined to make a certain amount of progress, which is going to inconvenience you, Sir Nicholas. We tried our level best this afternoon to co-operate, and were even prepared, up to the break, to accept that the Government could move their amendments formally in an attempt to make progress, although, for me, that was going almost a little too far. I want to make it clear that we will make as much progress tonight as possible, but we will not trample on democracy. We will not ignore our duty to scrutinise the legislation fairly and properly, so I apologise to you in advance, Sir Nicholas, if you have a late night.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

As Chairman, I am the servant of the Committee. Whether or not we sit late, it is my duty to be here. I must say that I enjoy it, and it is no inconvenience. As the hon. Gentleman will have heard, I said that we are going back to old times, with the House sitting and doing its job until at least 10 o'clock, or later.

The hon. Gentleman raises a relevant and important point of order. I do not think that I am revealing anything that a Chairman should not if I say that when I was speaking to the Paymaster General just before I entered the Room, I commented that other than perhaps getting slightly bogged down in the technicalities of environmentally beneficial machinery, the Committee had worked very hard. I could not think of any debate in which there had been any unnecessary delay or filibustering.

I concede that, in anyone's opinion, the programme motion is very strict and the knives perhaps come down at times that many Members find inconvenient. However, I repeat to the Opposition Whip, the hon. Member for Spelthorne (Mr. Wilshire), that that motion was a decision of the House, and we have to accept it. I hope that both sides of the Committee will continue to work well together, as they have in all the sittings over which I have presided.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I congratulate you on your vigour and fortitude, Sir Nicholas, having been in the Chair since 8.55 am.

I was speaking to the amendments, beginning with amendment No. 142. I was about to make the point that the proposals were billed as anti-avoidance legislation to justify their taking retrospective effect. The changes to section 83 of the Finance Act 1989, and much of the other legislation, are not concerned with anti-avoidance. The provision will result in substantial additional tax liabilities, and the introduction of the legislation with retrospective effect is therefore unjustified.

Amendments Nos. 142, 143 and 144 relate to each other. They seek to remove the retrospective effect of the legislation. In particular, new subsection (2) differs significantly from the old subsection (2) in that other income, which was not previously taxable, will be taken into account and taxed. New subsection (2)(b) deems the value of assets transferred from the long-term fund to be brought into account as an increase in long-term assets, which are also taxable. The effect of the provision is retrospective in cases in which other income arises or the transfer from the long-term fund is made pursuant to a pre-existing obligation or an obligation entered into after the date under which the transaction carried out for the purposes of contract occurred.

On amendment No. 147, the proposed changes to section 82(2) will unfairly affect life insurance companies by overriding specific tax exemptions, which apply to all other trading companies. However, we welcome the interest on tax repayment being specifically excluded from the provisions. There remains scope for altering the tax treatment of further items, which would normally be regarded as exempt or non-taxable, in line with other trading companies.

Amendment No. 147 is a probing amendment; to achieve the balance that we want would only require a modest change.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

The Committee will know that I am not a financial expert. My hon. Friend says that the provision will affect life assurance companies. Can he tell the Committee about its effect on people who have life insurance? Will they get lower payments and be further disadvantaged on top of all the other things that have happened to insurance and pensions companies?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

My hon. Friend is well aware of the fragile state of the life insurance industry. To the extent that those companies' tax bills go up, there are fewer benefits for policyholders. Some companies charge their policyholders in one way; others charge them in another. The risk is that ordinary citizens and their policies will suffer from the stealth taxes introduced by schedule 33. The provision is particularly inappropriate given that the amounts raised will not be huge. It is a massive change to the tax law that fiddles around to the detriment of policyholders while providing no huge advantage to the public revenues.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

Can my hon. Friend confirm that ordinary citizens will end up getting less money than they thought if the Government implement the changes?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The answer to my hon. Friend's question is yes, but the extent of the loss will depend on many other factors. If life companies pay more tax, the net effect will be that ordinary folk who are the beneficiaries of policies will receive less.

Amendment No. 137 seeks to grant a statutory deduction for other expenditure. Subsection (2) takes other income into account as a receipt, which means that there is no basis on which income may be adjusted out in accordance with the case 1 principle, except where there is a statutory exception. There is, however, no commensurate deduction for other expenditure, which the amendment would grant.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

Again, if I understand my hon. Friend correctly, if the Government were to accept the amendment, the ordinary citizen would probably lose less money. If they are minded to resist the amendment, they will be taking more money than is necessary from ordinary citizens' insurance policies.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

As ever, my hon. Friend makes his point forcefully. He should wait for the next amendment, which is even more significant for ordinary people. Amendments Nos. 133 and 134 seek to address Scottish Widows and Friends Provident. Although there are major differences between those two demutualisations—one was an acquisition, the other a flotation—they share the key feature that surplus assets accumulated in a mutual environment were transferred to a proprietary company and the members of the mutual received the value of those assets. The members were taxed on their receipts and, in the case of Scottish Widows, substantial amounts of tax were paid. In the case of Friends Provident, members have paid or will pay tax on the disposal of their shares. In both cases, the surplus assets remain

part of the long-term insurance fund of the transferee company, and they can be transferred to the shareholder's fund only if they are first brought into account in the company's regulatory return.

Current tax legislation contains provisions governing the computation of trading profit, and in particular provides that any increase in value of the assets of the company's long-term insurance fund is treated as taxable to the extent that it is brought into account in the company's regulatory return. There are difficulties in identifying specific components of any amount so brought into account, and both companies established a special account, which is referred to as a capital reserve, representing the value of the surplus assets transferred from the mutual in order that the value might be clearly identified. Tax counsel has advised both Scottish Widows and Friends Provident that the existing tax position is clear, and that transfers out of their respective capital reserves do not constitute increases in the value of their assets and are not taxable in the transferee company.

The Finance Bill states that all amounts brought into account in a life company's regulatory return are taxable, regardless of their nature or origin. If the provision were enacted, it would impose a tax on Scottish Widows and Friends Provident at the point at which their respective capital reserves are transferred out to shareholders. In other words, it will result in double taxation of the two organisations' surpluses. Those surpluses arose in a non-taxable mutual environment and belong to policyholders, who paid tax on the value of the surplus assets when Scottish Widows was acquired and Friends Provident was listed. Taxing the same surplus assets now would impose an unfair liability, and the Revenue has acknowledged that the surpluses were properly created in a post-tax environment.

Photo of David Wilshire David Wilshire Conservative, Spelthorne 9:45 pm, 20th May 2003

I am listening ever so carefully to my hon. Friend and am trying to ensure that I fully understand his argument. We are discussing money on which tax has been paid and which would otherwise go to policyholders who have paid their premiums. They will now get less money because the Government want to tax them a second time. Is that what my hon. Friend is trying to get me to understand?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Not quite, but nearly. My hon. Friend will recollect that both organisations were mutuals. As I commented when one was listed and the other sold, the members of those mutuals were entitled to the proceeds. What they have received is taxable, and tax has been paid. The point that I have tried to make at some length, because it is quite complicated, is that if the Bill goes through as drafted, the undistributed reserves due to go to shareholders would suffer double taxation. Therefore, we are talking here not about policyholders, but about the hundreds of thousands of people who were mutual members of Scottish Widows and Friends Provident.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

I am beginning to grasp the situation. My hon. Friend refers to reserves. Am I right in understanding that those reserves have been accumulated after tax has been paid?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Yes, historically. The element of double tax arises from the fact that the ex-mutual members have paid or will pay tax. To the extent that they have not had all their money yet, they will pay tax on it when they get it, but now an extra tax will be levied when the funds flow out of the reserve account.

The amendments would ensure that a proper amount of tax is paid by policyholders and companies on the surpluses and would prevent double taxation. Because of the double taxation, the Bill could result in capital being locked into the life funds of Friends Provident and Scottish Widows, which the groups may wish to utilise elsewhere in their business or for further acquisitions. If that were so, the practical impact of the provisions would be commercially damaging, as well as leading to double taxation.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

This gets worse and worse. Can my hon. Friend tell me what the commercial damage would be? Again, not being a financier, I do not understand these things, but it would be helpful if my hon. Friend could enlighten me on the damage.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I had just endeavoured to explain that the funds would be locked into the respective life funds and could not be used by those two groups elsewhere in their business because of the tax penalties that would result. Therefore, in essence it would be dead capital that could not be constructively used.

There are other affected parties. The draft clauses would affect the ability of other companies to demutualise efficiently. The Scottish Widows transaction provided policyholders with immediate cash value for surplus assets, something that no other demutualisation has done. Other potential acquirers of mutual companies would not wish to pursue the same route, faced with a potential double tax charge. My understanding is that the Treasury and the Revenue have taken a more sympathetic approach to this matter, and I hope that the Economic Secretary will be able to make a useful comment on the Government possibly reconsidering these provisions.

I do not wish to speak to amendment No. 147, as it duplicates another amendment. Amendment No. 148 seeks to clarify the operations of one of the proposed provisions. Proposed new section 83(2C) provides that proposed new section 83(2B) will apply to the repayment of loans only if the loans were brought into account for the period of account but were not taxable for the period of account under section 83(2), but it is not clear to which period of account the measure refers. I understand that the intention is that the section will apply to the period of account in which the loan is made, rather than the period in which the repayment is made. It would be helpful if that could be clarified.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

I understand what my hon. Friend says, but what would be the difference between the two periods? I am trying to get my mind around that, as I am not the expert that he is. Can he explain what the impact would be if one period were preferred to the other?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

It is relatively self-evident that there are two crucial issues: when tax will eventually be paid,

whether sooner or later; and how much tax will be assessed. There is an important matter of tax cost timing but also a need for clarity, which is a major part of what the amendment is about.

Photo of Kali Mountford Kali Mountford Labour, Colne Valley

I am at a loss to understand whether Opposition Front-Bench Members understand the clause or their amendments. It seems from the interventions that the Opposition have not consulted each other on them. Is that the case?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I thank the hon. Lady for that question. I am pleased to advise her that our amendments and briefing notes are regularly circulated to the members of our team, and we regularly meet for briefings and updates. However, she will be aware that the subject is very complex. Indeed, it is one that I do not claim to be on top of or about which I know as much as I could. Therefore, many hon. Members may not fully realise the implications of the Government's proposals or the Opposition amendments that have been tabled to ameliorate them.

Photo of Kali Mountford Kali Mountford Labour, Colne Valley

I am grateful for and understand that explanation. However, I would understand it better had not all the Opposition Front-Bench Members put their name to the amendments. Is not it the case that the Opposition agree to amendments before tabling them?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Of course everyone agrees the amendments before they are tabled, but being refreshed as to their full implications is, with respect, quite another matter. However, I thank the hon. Lady for livening up our proceedings.

Let me rattle through the amendments as speedily as possible. Amendments Nos. 138 and 139 concern the proposed changes to section 83(6) and (9) of the Finance Act 1989, which are covered in paragraph 2 of schedule 33. The changes will have a significant impact on commercial reinsurance transactions undertaken by life insurance companies and could levy a significant tax cost on transactions for which there will be no tax motivation, while in effect denying relief for trading losses.

The legislation does not take account of the fact that reinsurance arrangements are central to the business of insurance and that companies enter into such arrangements for purely commercial reasons. The proposals apply only to reinsurance arrangements that could be viewed as alternatives to a transfer of business. However, the Bill could go further and have an impact on a wide range of commercial reinsurance arrangements.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

Now I am on ground that I understand. The reference to trading losses is familiar to me. When I ran a business I knew all about trading losses. I also knew perfectly well that in the years in which I made a loss I could offset it against profit that I made. Are the Government trying to tax people when they make a profit and make them suffer when they make a loss?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

At the bottom of the heap, yes, but, as I will explain, the main impact is that the costs of reinsurance could be increased substantially and its availability could be limited. The latter effect, in a market in which there are already acute problems in obtaining professional indemnity cover and employer's liability cover, could be significantly damaging in a wider economic context.

It is quite common for only one life insurance company in an insurance group to write business directly to the public and then reinsure part of that business to a pension company or a linked company to manage the business more efficiently. Under the Bill, companies that suffer trading losses will be taxed on capital added to the long-term insurance fund in connection with such reinsurance arrangements. That effectively denies relief for trading losses on reinsured business and means that companies will be penalised for using reinsurance to assist in funding new business.

The amendment, which would bring pure reinsurance within section 83(3), would have a significant impact on all reinsurance groups. The requirement for additional capital to fund a loss is not uncommon for any company and the pure reinsurers are no exception. It is unjust for companies to be penalised by the proposed arrangements as a result of the nature of their trade. The proposals would make it extremely difficult for pure reinsurance companies to capitalise themselves without suffering adverse tax consequences.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

I am listening carefully to my hon. Friend, and I heard him say that if things were to go ahead as the Government want, there would be a real risk that the cost of reinsurance would go up and its availability might decline. Is there any possibility that if the measures were to go ahead, businesses in this country would be forced to look abroad for the same sort of reinsurance cover that they might otherwise have got in London? If that were the case, would that not start to undermine the London insurance market and play into the hands of foreign competitors?

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

My hon. Friend will be aware that the London reinsurance market is already relatively uncompetitive and losing business as a result of past tax changes. The provisions could worsen that problem. As I commented, there are the dual effects of the failure of trading losses relating to reinsurance to be relieved and the knock-on effects on the reinsurance market.

I am focusing on amendments Nos. 138 and 139. Paragraph 2 will amend section 83 of the Finance Act 1989. It is an anti-avoidance provision that requires certain additions to the long-term fund of a life insurance company to be treated as taxable for the purpose of ascertaining whether the life insurance company has made a loss in a computation prepared on case 1 principles, for profit computations for pension business, individual savings account business, overseas life assurance business and life reinsurance business. The overall notional case 1 profit computations determine the element of the company's profits to be taxed at shareholder rates.

For the provision to apply, the addition needs to have been made as part of, or in connection with, a transfer of business. Even under current law, the provision is widely drafted and capable of disallowing losses that are unconnected with the addition, for example, those that arise on new business. Paragraph 2(6) and (9) propose the widening of the definition of transfer of business. That definition already includes reinsurance as equivalent in practical terms to the transfer of a portfolio of contracts, but does not include reinsurance with a pure reinsurer, or reinsurance of new business. Those changes were not signalled in the press release of 23 December 2002, nor were they discussed with consultees prior to the release of the Finance Bill. The amendments are designed to prevent the widening of the definition of transfer of business.

Amendment No. 149 is essentially a probing amendment. Paragraph 3, which is key, introduces a provision in respect of contingent loans to life companies. It is a relieving provision and, as such, is welcome in principle. However, it does not go far enough and could accelerate tax in non-abusive situations. Amendment No. 149, like further detailed amendments that we may table later, seeks to deal with those situations. This amendment has been tabled as a probing amendment, in case it is not possible to pursue such additional amendments later.

The Revenue's aim has been stated in correspondence and in the explanatory notes as being to catch only abusive transactions, without penalising commercially motivated transactions. However, the legislation does not meet that aim and could affect the ability of insurance companies to achieve their required solvency positions. We believe that the legislation should be amended to allow the transfer of normal surplus to shareholders without penal tax costs. For those purposes, normal surplus should be surplus not funded out of or in connection with a contingent loan. The proposal to link allowed transfers to shareholders only to bonus payments is clearly inappropriate where a contingent loan is made to a non-profit fund, for which are no bonus payments.

Amendment No. 150 seeks to address the changes that paragraph 9 makes to section 432E of the Taxes Act 1988, which will tax mutual insurers on any surplus after allowance for the declaration of bonus. Although such a situation is unusual, it is not unheard of. The proposals could unjustly tax certain mutuals, for example when a mutual has two sub-funds and the Financial Services Authority allows one to declare surplus to support the other. In that situation, the mutual has no surplus overall, but the proposals will tax the surplus on the sub-fund that is providing support. The intent is to address a particular arrangement on the demutualisation of a business, so this relates to the points raised under amendments No. 133 and 134.

The Revenue is attempting to address a problem that it has seen as an abuse, but we feel that the provision should be amended to target only certain arrangements, such as a demutualisation within a

certain period following the declaration of a surplus, or when the position of the long-term insurance fund as a whole is taken into account.

Amendment No. 151 is essentially a probing amendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 10:00 pm, 20th May 2003

Order. I have selected amendment No. 151 for debate on its own, later on.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I am sorry, I thought that they were all grouped together.

I cannot believe it, but I seem to have ploughed through my several points. I trust that the Economic Secretary will be aware of most of them, as I know that there have been representations to the Revenue, and just the other day there was a major industry conference in which the Revenue participated. I know that the industry does not want the Treasury to think that it does not acknowledge some of the favourable aspects of the reforms; but the industry, its advisers and I feel that the points that we have referred to are on provisions that do not do anything helpful and the issues that they deal with could be better addressed.

I have spoken to all the amendments in the group. As I commented earlier, we will want to press amendments Nos. 133 and 134 to a vote later, in whatever constitutional way we may, if the Government do not agree to accommodate them in some way.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

There are many problems with the schedule, and we have received an enormous number of representations on it. The Opposition amendments show that we believe that many changes need to be made, and the number of Government amendments to the schedule makes it clear that we are not the only ones who think that it is not yet right.

The schedule closes loopholes, but it potentially creates taxes for many more people. It is worth reiterating the point that my hon. Friend the Member for Arundel and South Downs made: the Bill contains many pages of legislation, but we are not entirely clear how great an effect for the good they will have.

These provisions are extremely complicated. Although I shall speak to the amendments, I am sure that everyone will be pleased to hear that I shall switch to plan B and distil my remarks down to five key points and questions. First, paragraph 2 seems to be retrospective in effect. It relates to cases in which other income arises or a transfer is made from a long-term fund, pursuant to a pre-existing obligation before 23 December 2002 or an obligation entered into after that date under a transaction carried out for the purposes of a contract or transfer scheme made or sanctioned by the court before that time. What is the Minister's view on that?

Secondly, it does not seem appropriate that, under paragraph 2, amounts that would not be taxed under normal trading principles will potentially be taxed for a life assurer through group relief receipts, capital contributions from other companies and other capital receipts. Thirdly, the schedule could cause an acceleration of tax for innocent commercial loans.

With regard to contingent loans, the deduction given in new section 83ZA has a limit clearly calculated by reference to normal transfers to shareholders based on a 90:10 ration fund. However, as the Law Society has pointed out, under this proposal, when a non-profit company has a surplus and a transfer to shareholders is funded from that surplus, the end result is unreasonable.

My fourth point is another Law Society point and relates to anti-avoidance. The main purpose of the schedule is to require that additions to the long-term fund of a life assurance company be treated as taxable to ascertain whether the company has made a loss in a computation prepared on case I principles. For the anti-avoidance provision to apply, the addition needs to have been made as part of or in connection with a transfer of business, but even under current law the provision is widely drafted and capable of disallowing losses unconnected with the addition.

Finally, the widening of the definition in sub-paragraphs (6) and (9) of paragraph 2 of transfer of business, which already includes most reinsurance, but not reinsurance with a pure reinsurer or reinsurance of a new business, is not welcome, and many people have responded on the schedule. The scope of section 83(3) of the Finance Act 1989 is believed by many to be too wide, so amendments to sub-paragraphs (6) and (9) have come as a surprise, particularly as they were not mentioned in the 23 December press release.

Photo of John Healey John Healey The Economic Secretary to the Treasury

We are considering a significant schedule and a large number of amendments, on which some serious arguments have been made, particularly by the hon. Member for Arundel and South Downs. However, I shall start with one argument that is not so serious.

The idea that the combined effect of clause 169 and the schedule puts life companies at a disadvantage is wrong, as is the idea that it is a set of stealth taxes that increases the life assurance industry's overall tax burden. The combined impact of the clause and the schedule will reduce the overall amount of tax payable by insurers by an estimated £40 million a year by 2004.

Those measures will not raise the general level of tax payable by insurers, but will prevent a small number of companies from exploiting their circumstances to pay much less tax than other companies writing similar business. The changes will therefore protect the tax base and ensure a fairer distribution of tax across the industry.

The hon. Gentleman paid tribute to the right hon. Member for Fylde, who I am sad to see is not in his place. Each year for a number of years the right hon. Gentleman has tabled a new clause to the Finance Bill and has argued for a reduction in the rate of tax on the capital gains that a life assurance company pays on behalf of its policyholders. He, like the industry, will welcome the fact that the Government have accepted his proposal this year­in paragraph 12 of schedule 33­and are reducing the rate from 22 per cent. to 20 per cent. The right hon. Gentleman did not realise when he made his speech in the Chamber on Second

Reading that we had made that change. I am glad that he can be in no doubt of it now. Our view was that it is right to make the change now as part of the package of changes that the clause and schedule introduce.

The hon. Member for Arundel and South Downs also referred to an assessment of impact. He will know that no regulatory impact assessment is required for anti-avoidance measures. Nevertheless, Revenue officials have worked hard with the industry, and especially the Association of British Insurers, to modify the original proposals to meet the industry's concerns about compliance costs. That is particularly the case with the bed-and-breakfasting measures that the hon. Gentleman mentioned, where we have changed the approach to reflect a suggestion from the ABI and have excluded losses between 23 and 31 December totalling less than £10 million per company. An exclusion for interfund transfers to match assets with limited liabilities has also been introduced as a result of those discussions.

The hon. Gentleman and the hon. Member for Huntingdon raised the spectre of retrospection. It is standard practice for anti-avoidance rules to be announced in the news release with the intention that the legislation will apply from the date of the news release. I see that the hon. Member for Arundel and South Downs is nodding his head, so he accepts that point. Experience showed that the tackling of avoidance often took place at the end of the calendar year. The legislation announced on 23 December was designed to tackle that, and was made public as soon as possible. Parliament now, quite properly, has a chance to debate the legislation. Let me be clear on the matter: there is nothing retrospective about the changes. The only effect is on the computation of profits for periods after the date of the announcement. The changes may affect future profits arising from past transactions, but there is nothing unusual in that.

I shall deal with the accusation that the measure is somehow double taxation. I refute that; no profits are being taxed twice. However, compensation paid to former members of mutuals was in principle liable to capital gains tax, but in practice little tax would have been paid. The argument that the hon. Member for Arundel and South Downs appears to be making is that when a business is sold, the price paid for the business should be deducted from future profits. That does not happen to other businesses, and there is no reason why it should happen in this case.

The real issue is not double taxation of profits, which will not happen, but the creation of wholly spurious losses, despite the fact that mutuals could never have had losses. There is no justification for creating tax losses when there are profits in both the regulatory and Companies Act accounts. That would be wholly unjustifiable and a raid on the Exchequer.

I shall now deal with the amendments, and will briefly touch on the most significant of the Government amendments. In introducing clause 169, I emphasised the process that we have conducted in preparing the measures set out in the clause and the schedule. As a result of the consultation, schedule 33

reflects a large number of the changes, most of which have been welcomed by the industry. It also contains one or two extra measures to stop further avoidance schemes that had come to light. It contains, to the universal approval of the industry, that long-sought reduction in the corporation tax rate for all life assurance companies. The measures are not wholesale increases in the tax charge imposed without warning on an unsuspecting industry, but have been refined through an open, consultative process to reduce the compliance burden on companies while maintaining their effectiveness in ending avoidance.

All the amendments we are considering in this large group concern how the trading or case I profits of life insurance companies are calculated, which is why both Government and Opposition amendments have been taken together. The hon. Gentleman described the Opposition amendments as mainly probing amendments. I shall attempt to explain why we are encouraging him to withdraw the amendment. If he will not, I shall ask my hon. Friends to reject it. The hon. Gentleman stressed the importance of amendments Nos. 133 and 134. They are important and they are different from the other amendments. They concern something that is not in the schedule, because they deal with life assurance companies that have demutalised.

Amendment No. 133 is consequential to amendment No. 134, so I shall deal with the latter. It would remove from the trading profits of the demutalised business unrecognised market value increases that took place while the business was owned by a mutual insurer. Before the Budget we received strong representations from two companies running previously mutual businesses, which asked for such a measure. Their representations were carefully considered by Ministers. All the possible options were considered, but we decided we could not, and would not, give the companies what they were asking for. There is an important dispute over what they are asking for.

The companies think—the hon. Member for Arundel and South Downs confirmed that their counsel offers this advice to them—that the current law allows them to leave out of account for tax hundreds of millions of pounds of profit, which means that they may end up with massive tax losses that are not reflected in the accounts. They think that the schedule changes the law to stop that. The Inland Revenue, backed by counsel's advice, takes the view that what the companies want to do is not allowed under current law. The schedule puts that beyond doubt for the future. Our judgment is that it is better to do that than to leave the matter entirely to litigation, which can never be certain. There may be litigation for the past, but the position should be clear for the future. Unlike those advocating the amendments, the Government believe that the current law is the right approach.

The amendment could allow hundreds of millions of pounds of losses to arise for tax purposes, even when the company's regulatory return and statutory accounts showed a surplus. Apart from the obvious

problem of a provision with that effect, it is significant that a trading loss for tax purposes cannot arise in a mutual company. The supporters of the amendment are saying that, as the business could not have made a trading profit if it had remained a mutual company, it should be allowed to generate a loss, which could never have happened in a mutual company. The hon. Member for Arundel and South Downs wants to have the cake and eat in a big way.

It will be clear from what I have said that we believe that the law should be what our legal advice says it is and what schedule 33 makes certain it will be when the Bill becomes law.

Under amendment No. 137, which, as the hon. Gentleman said, was proposed by the Law Society, all items shown as ''other expenditure'' in the revenue account and the FSA return of a life assurance company must be deducted whatever their nature. Some argue that that is only fair because the changes to section 83(2) of the Finance Act 1989 and the Bill bring in all receipts in that revenue account as income. The answer is twofold. First, changes to section 83 are intended to put beyond doubt what is already the case for most items of income. Secondly and more importantly, there are clear exceptions in the schedule to the rule that income shown in the return is also income for tax purposes. There are three exclusions: one for notional income, another for other amounts which represent previously taxed amounts and a third for amounts that are exempt from tax. There are no such exclusions in the amendment.

Amendments Nos. 138 and 139 refer to changes in the Bill that will have effect from 9 April—Budget day. There may be a misunderstanding. In amendment No. 138, the complaint is that pure reinsurers will be unable to take on business because their losses will be restricted. The section concerned applies only to a limited class of reinsurers and not when a reinsurer takes on only the morality risk in a policy. That is what pure life reinsurers mostly do. There is concern about the London reinsurance market, but in our judgment there should be none. In the UK, life reinsurance is a niche market with very few big players. The schedule will have no effect on commercial reinsurance arrangements. It is aimed at transfers of business dressed up as reinsurance.

Amendment No. 139 may also be based on a misunderstanding. Some companies have realised that they can generate artificial losses by creating a new company to reinsure a stream of new business in the old company. It surrenders those losses as group relief but, although it is a new company, it is not a start-up company. The previous Government was concerned about protecting start-up companies when they put the rules in place in 1996.

I shall next deal with amendments Nos. 142 to 144. In many ways, only amendment No. 144 is substantive, but it suffers from difficulties that are similar to those of amendment No. 134. It makes assumptions about existing law that are not necessarily correct. If the Inland Revenue is right about existing law, the amendment achieves nothing. However, the real thrust of the amendment is to remove what the Law Society considers the retrospective nature of the

changes. I have explained that there is nothing retrospective about them. They were announced on 23 December 2002, before the legislation took effect.

Amendment No. 145 is also aimed at much the same point, but it would remove not only items that arise from a transfer of business, but all of them. It assumes that section 83(2), as amended by paragraph 2 of the schedule, changes the law fundamentally, but that is not right. Therefore, amendment No. 145 is also based on a mistaken premise.

Amendment No. 149 would delete the whole of the new rules about contingent loans. Following extensive consultation, the draft rules on contingent loans were changed so that they will not affect loans made to insurers for solvency purposes but will stop insurers using contingent loans to avoid tax.

The hon. Member for Arundel and South Downs argued that companies should be able to use such loans to make shareholder distributions without, I believe, a tax charge. It remains a key feature of the rules for computing case I profits of life companies that a company has considerable control over the emergence of profits. It can defer the recognition of gains and so defer the emergence of profits, in which case the deferral is followed for tax purposes. However, a company can also accelerate the emergence of profits—the use of contingent loans is one way of doing just that—thereby allowing shareholders to receive the profits earlier than would otherwise have been possible. The new rules are designed to ensure that the accelerated extraction of profits is also followed for tax purposes. To allow contingent loans to be used to fund shareholder transfers would completely undermine the objective of the legislation.

I am aware that not everyone in the industry is convinced that only abusive uses of contingent loans will be caught. I suggest to the industry, through the hon. Gentleman, that those who believe that to be the case and believe that they have arguments to support their position should come up with specific, hard examples to demonstrate it. I encourage them to contact Revenue officials, because if Ministers are required to consider the matter further, we will do so.

Amendment No. 150 is another wrecking amendment.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield 10:15 pm, 20th May 2003

I hope that the Economic Secretary will rephrase that, because the amendment would not have been selected if it were a wrecking amendment.

Photo of John Healey John Healey The Economic Secretary to the Treasury

Amendment No. 150 would wreck the purpose of the provisions that we are trying to put in place in the schedule, which aims at removing a special rule that assumes that a mutual company can never have a surplus. In most cases, mutuals do not have a surplus. However, some mutual companies that have demutualised have exploited the rule to ensure that profit is sheltered from tax while in the mutual and never brought to account for tax purposes. Sub-paragraph (3) removes a rule that helps tax avoidance.

Before I move on to speak briefly about Government amendments, I should say that I stumbled a little earlier. I may have said about reinsurance that section 83(3) does not apply if a reinsurer takes on only the morality risk.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The ever-vigilant ears that accompany our proceedings caught that slip of the tongue.

Government amendments Nos. 159 to 161 make a slight technical change to section 83 of the Finance Act 1989 by inserting a new subsection. The amendments will ensure that the legislation charges to tax only its intended objectives. Government amendment No. 162 operates in the same area as those amendments, but the change is even smaller. It changes ''the'' to ''any'' and performs the same function as Opposition amendments Nos. 147 and 148, but it is more economic and grammatical. It is, however, potentially significant because it protects the Exchequer. Without it, a company that used a loan to reduce its tax liability before 2003 would escape any tax charge, even when it repaid the loan.

Government amendments Nos. 163 and 165 are designed to ensure that there is no loss of tax when a life assurance company transfers its entire business to another company. A great deal of tax is at stake if the loophole is not closed, and I contend that it is clearly right to do so.

When I examined the clauses while preparing for the Committee, I had some detailed discussions with officials who have lived with the policy area for a good while. They said that it is the most complicated area of tax legislation that any of them have faced in their careers. In the light of that judgment, the Committee has managed rather well tonight by thoroughly scrutinising the proposals in the clause and the schedule. I recognise, however, that there has not been a lot of time to scrutinise the detail of the provisions in clause 169 and schedule 33 since they were published in the Bill.

I therefore suggest to hon. Members and those who advise them that if some bodies still have concerns about the provisions in the Bill, they should develop those detailed concerns, show the evidence on which they are based and enter into detailed discussions with Revenue officials. If there are real problems with which we must deal, Ministers will consider whether something appropriate should be done at a later stage. In the light of that concluding statement, I hope that Opposition Members will not press their amendments. If they decide to press them, I must ask my hon. Friends to reject them.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I thank the Economic Secretary for his comprehensive review of the highly complex measures at such a late time in the evening. In the main, he has satisfied the concerns raised by our amendments.

There is one matter on which I am certainly not satisfied. When he discussed amendments Nos. 133 and 134, which address whether past surpluses achieved by insurance companies are taxable, he suggested that profits are currently escaping tax. He

would agree that those surpluses arose during the non-taxable mutual environment and did not arise after those businesses became commercial businesses. Economically, those surpluses must surely belong to the policyholders who paid tax on the value of the surplus assets when Lloyds acquired Scottish Widows and when Friends Provident was listed.

The Economic Secretary will know that there is disagreement between leading tax counsels. It is clearly a material point, given the problems that such businesses face in the present environment, which have done so much damage to Equitable Life. As well as the straight legal argument, there is a practical argument in relation to underlying businesses. I therefore do not want to press our amendments, with certain exceptions—we still feel that the Government's stance is not entirely correct and we want to flag that up. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 159, in

schedule 33, page 376, line 30, leave out

'in a period of account'.

No. 160, in

schedule 33, page 376, line 32, after 'account' insert

'in which the transfer takes place or any earlier period of account'.

No. 161, in

schedule 33, page 376, line 34, after second 'account' insert

'in which the transfer takes place'.

No. 162, in

schedule 33, page 376, line 44, leave out 'the' and insert 'any'.

No. 163, in

schedule 33, page 377, line 2, at end insert—

'(2E) If subsection (2B) above applies in relation to the transfer of all the assets of the company's long term insurance fund in accordance with—

(a) an insurance business transfer scheme, or

(b) a scheme which would be such a scheme but for section 105(1)(b) of the Financial Services and Markets Act 2000 (which requires the business transferred to be carried on in an EEA State),

the reference in that subsection to an amount being deemed to be brought into account for the period of account in which the transfer takes place is to its being so deemed for the period of account ending immediately before the transfer takes place.'.

No. 164, in

schedule 33, page 386, leave out lines 41 to 43 and insert

'In arriving at the policy holders' share of chargeable gains accruing to an insurance company under subsection (10) above there is to be ignored—'.—[John Healey.]

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 151, in

schedule 33, page 387, line 38, leave out from beginning to end of line 9 on page 389.

The bed-and-breakfast provisions as set out in paragraph 14 are widely accepted as a significant improvement on the original draft legislation, but there are some areas of minor concern. There are certain inconsistencies between the way in which the legislation will apply to life companies as compared with other trading companies. New section 21OB(6) excludes annual deemed disposals of unit trust holdings, but does not exclude all transactions

relating to section 212 assets. The exclusion of those assets from the law altogether would significantly reduce the compliance burden for many companies, as it would be considerably easier for their capital gains tax systems to exclude the class of assets. Reducing the systems burden caused by the proposals is a significant matter.

Amendment No. 151 is not ideal and, after further consultation, we have worked out a better amendment. It is, therefore, a probing amendment to see whether the Government have thought about the system at issue and have anything constructive to offer.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The amendment would delete the new provisions in the Bill intended to stop life companies from using bed-and-breakfasting assets to generate capital losses. It is perhaps appropriate that we are considering the provision at this stage of our proceedings.

Bed and breakfasting is when companies sell assets and buy them back almost immediately to create capital losses. All other companies are subjected to rules designed to stop bed and breakfasting. The Bill introduces a rule for life companies tailored to their particular circumstances.

There has been extensive consultation with the industry on these measures and, in particular, on the costs to it of complying with the new rules and the start date. Changes have been made as a result of that consultation to reduce the compliance costs and make the measures more workable for insurers.

The hon. Gentleman asked about deemed disposals of unit trusts and their exclusion. Deemed disposals are subject to special rules that spread any gain or loss over a seven-year period. Because of the spreading rule, it was not necessary to include deemed disposals in the bed-and-breakfasting rules. Actual disposals are not subject to the spreading rule, so can be used for bed and breakfasting to create losses. For that reason, it would be inappropriate to exclude all disposals of unit trusts, as that would leave an obvious loophole in the legislation.

With that explanation, I hope that the hon. Gentleman will agree to seek to withdraw the amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I think that the Economic Secretary is saying that if unit trusts were put into the same category as other financial assets, that could be disadvantageous in tax terms to insurance companies. That is why negotiations and discussions so far have resulted in these differences.

This is essentially a probing amendment. The Economic Secretary has satisfied me that the territory has been gone over well, but I should be grateful if he could clarify the point about unit trusts.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Right. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 165, in

schedule 33, page 389, line 45, leave out

'the purposes of corporation tax'

and insert

'all purposes of corporation tax other than determining for the purposes of section 83(2B) of the Finance Act 1989 whether a transfer is brought into account as part of total expenditure.'.—[John Healey.]

Amendment proposed: No. 134, in

schedule 33, page 392, line 36, at end insert—

'444AF: Transfers of business: modifications of s.83(2)

(1) This section applies where there is a relevant transfer, under a scheme, of the whole or any part of the business carried on by a mutual insurance company (''the mutual'') to a company which has share capital (''the acquiring company'').

(2) In any accounting period of the acquiring company section 83(2) shall apply to so much of the amount brought into account as other income by that company as represents the accrued mutual value, but only as it would have applied before the amendments made by the Finance Act 2003, and if the requirements of subsections (4) and (5) below are satisfied in relation to the shares of a company (''the issuing company'') which is either—

(a) the acquiring company; or

(b) a company of which the acquiring company is a wholly-owned subsidiary.

(3) For the purposes of this section the accrued mutual value is the fair value of the assets of the mutual immediately before the relevant transfer less the value of the liabilities of the mutual ascertained as at that date in accordance with section 5 of the Prudential Sourcebook (Insurers).

(4) Shares in the issuing company must have been offered, under the scheme, to at least 90 per cent. of the persons who immediately before the transfer are members of the mutual.

(5) Under the scheme, the majority of the shares in the issuing company which were in issue immediately after the transfer was made, other than shares which were issued pursuant to an offer to the public, must have been offered to the persons who (at the time of the offer) were—

(a) members of the mutual;

(b) persons who were entitled to become members of the mutual; or

(c) employees, former employees or pensioners of the mutual or of a company which was a wholly-owned subsidiary of the mutual.

(6) For the purposes of this section, a company is a wholly-owned subsidiary of another person (''the parent'') if it has no members except the parent and the parent's wholly-owned subsidiaries or persons acting on behalf of the parent or its wholly-owned subsidiaries.

(7) In this section—

''contract of insurance'' has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001;

''employee'', in relation to a mutual insurance company or its wholly-owned subsidiary, includes any officer or director of the company or subsidiary and any other person taking part in the management of the affairs of the company or subsidiary;

''insurance business transfer scheme'' has the same meaning as in Part 7 of the Financial Services and Markets Act 2000;

''mutual insurance company'' means an insurance company carrying on business without having any share capital;

''pensioner'', in relation to a mutual insurance company or its wholly-owned subsidiary, means a person entitled (whether presently or prospectively) to a pension, lump sum, gratuity or other like benefit referable to the service of any person as an employee of the company or subsidiary.

''relevant transfer'' means a transfer from a company to another person of business consisting of the effecting or carrying out of contracts of insurance which is effected under an insurance business transfer scheme.

(8) The Treasury may by regulations amend subsection (4) above by substituting a lower percentage for the percentage there mentioned.

(9) The Treasury may by regulations provide that any or all of the references in subsections (4) and (5) above to members shall be construed as references to members of a class specified in the regulations; and different provision may be made for different cases.

(10) The power to make regulations under this section shall be exercisable by statutory instrument subject to annulment in pursuance of a resolution of the House of Commons.'.—[Mr. Flight.]

Question put, That the amendment be made:—

The Committee divided: Ayes 3, Noes 11.

Division number 11 Adults Abused in Childhood — Schedule 33 - Insurance companies

Aye: 3 MPs

No: 11 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 152, in

schedule 33, page 394, line 13, at end insert 'assets'.

I shall be exceedingly brief. This is a probing amendment, as it seems unclear that the apportionment rules set out in paragraph 20 will produce the correct result if the transferred business was previously reinsured by the transferer to the transferee. Thus the liabilities would be included in the opening liabilities of the transferee. I understand that such a situation is not unusual. Our amendment is designed so that the provision would not apply to situations in which assets had previously been transferred under reinsurance arrangements.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I accept that the amendment is a probing one. I understand that a major firm of accountants is advocating the amendment, and that it thinks that the amendment will make the provision work properly when one company that has reinsured business with another transfers that business to the reinsurer. There may be situations in which the provision does not give quite the right answer. I suggest that the hon. Gentleman's advisers get together with Revenue officials to establish whether there is a problem. If there is a problem, the solution is not just to add the word ''assets'', as the amendment does. On that basis, I hope that the hon. Gentleman will withdraw it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I thank the Economic Secretary for his response. If the problem that has been suggested to me exists, there is a route to solving it. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 33, as amended, agreed to.

Photo of Gillian Merron Gillian Merron Assistant Whip

I beg to move, That further consideration be now adjourned.

Photo of David Wilshire David Wilshire Conservative, Spelthorne

I realise that that is a debatable motion. I promise the Committee that I am not about to debate it. I simply want to put on record that after a hiccup the usual channels are back on track, and I am grateful for that.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I am grateful to the hon. Gentleman. I hope that before they leave the Committee Room

tonight, both Whips will clarify for the Chair how and when the knives will be out, and where they will fall.

Question put and agreed to.

Adjourned accordingly at eleven minutes to Eleven o'clock till Thursday 22 May at five minutes to Nine o'clock.