Clause 191 - Higher rate of tax: divided companies

Finance Bill – in a Public Bill Committee at 4:45 pm on 17th June 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I am glad that we have been able to dispatch our business so quickly and arrive at the only clause that deals with insurance premium tax. There is broad relief that, despite a report in The Times prior to the Budget announcing the possibility of a 1 per cent. increase, an increase was avoided. I have a few points and observations to make in the context of supporting and welcoming the clause.

The clause amends schedule 6A of the Finance Act 1994, which was inserted by the Finance Act 1997 under the last Conservative Administration. Section 51A and schedule 6A in the 1997 Act were brought in to prevent the avoidance of VAT by sellers of second-hand cars and household appliances, who would sell goods at a relatively low profit margin coupled with breakdown insurance at a high profit margin, exploiting the fact that, although the supply of goods was subject to VAT, the supply of breakdown insurance was subject only to insurance premium tax.

Section 51A provides that the premiums for insurance falling within paragraphs 2 to 4 of schedule 6A should be subject to insurance premium tax at the higher rate of 17.5 per cent. Paragraph 2 relates to insurance provided by the supplier of a vehicle or a person connected with them. The vehicle is a car or motor bike; the provision does not include

commercial vehicles—recall the discussion that we had on various aspects of the petroleum tax—nor my beloved ex-services Austin K9 vehicle. Paragraph 3 relates to insurance provided by the supplier of an appliance, or a person connected with them. Paragraph 4 relates to insurance against travel risks, no matter who the supplier is, hence travel insurance is not covered by the changes made by clause 191, except when it is provided free of charge. It is notable that it was announced the other day that travel insurance is not to be regulated when sold through and by travel agents, which obviously raises other issues.

By concession, the higher rate of insurance premium tax is not applied to ''ordinary motor insurance'' sold by car or motor cycle dealers as opposed to breakdown insurance. Also by concession, insurance premium tax at the higher rate is not applied to home contents insurance sold by retailers of domestic appliances. That was recorded in a Customs and Excise news release on 6 February 1997.

Clause 191 is intended to prevent the avoidance of liability for insurance premium tax at the higher rate when a divided company provides insurance. A divided company, which, as paragraph 12 of the explanatory notes on the clause explains, is known in some jurisdictions as a protected cell company, contains segregated compartments within it called cells. The cells can be owned and run independently of each other—their assets and liabilities being segregated—the result being that the person who owns and controls a particular cell may not control the company as a whole so as to make it connected with him. Accordingly, by providing breakdown insurance through wholly-owned cells of protected cell companies that they do not control, motor dealers and retailers of domestic appliances have been able to avoid paying insurance premium tax at the higher rate on the premiums for that insurance.

Although I support and understand the clause, I have a point to make in relation to drafting. There is no amendment proposed; I just want the Economic Secretary to take note. The new rules apply when any division of the divided company is connected with a—that is any—supplier of cars, motor bikes, or appliances. In theory, that could catch insurance provided by someone having no relationship with a supplier, provided that they were connected with another supplier. Although as a practical matter such a situation is likely to be rare, theoretically the drafting might reflect that more elegantly. The original legislation was widely drafted in that it covered the provision of insurance by a person connected with any supplier of cars, motor bikes and appliances.

The Institute of Chartered Accountants in England and Wales noted that the clause is described as an anti-avoidance measure and accepts the logic behind it. However, it noted that the case of Gil Insurance and others—case C-308/01—is currently before the European Court of Justice. That case raises issues about whether the UK higher rate of insurance premium tax is lawful under European VAT law, whether is it unlawful state aid, and, if so, whether it should be repaid to those businesses required by UK law to charge it.

The Institute of Chartered Accountants in England and Wales has stated:

''We note that the Court of Appeal in the 1999 Lunn Poly case [1999] STC 350 has already decided that the differential rates of insurance premium tax constituted a state aid under the EU Treaty, and since the European Commission had not been notified nor given its approval, the differential rates were illegal.

If Customs are unsuccessful in the ECJ case, the risk must be that clause 191 will also be ruled unlawful. We believe that this clause should be withdrawn pending the decision in that case.''

The Conservatives have not adopted that approach but wish to establish what the Economic Secretary has in mind and what his officials advise him is the status of the clause in the light of that particular case. Customs is contesting it, and the case is currently before the European Court of Justice. I look forward to his response.

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

I am grateful for the generous support of the hon. Member for Eddisbury for the clause. The Institute of Chartered Accountants of England and Wales raised a question with him about a court case. It is true that the legality of the higher rate has been challenged on several counts and that a case is due to be heard by the European Court of Justice. Customs and Excise remains confident of its case. The measure is not relevant to the case, so I am glad that the hon. Gentleman is not arguing that we should withdraw the provision pending the outcome of the case.

A common provision and a common purpose in parts of this Finance Bill, as in all previous Finance Bills, is to try to close loopholes in our tax legislation to prevent avoidance and revenue leakage. This is one such clause. As the hon. Gentleman reminded members of the Committee in a technical and detailed description of the background to IPT, the Government in 1996 announced that a new, higher rate of IPT would be introduced, in part to counter the tax distortion arising from contract restructuring when insurance was sold alongside certain goods. The higher rate was intended to apply when certain types of insurance are sold by the supplier of the goods or by what is described in the legislation as ''connected persons''—usually where one company has a controlling interest in another company.

The clause revises the definition of connected person to include what are described in the legislation as divided companies. The main purpose of the change is to ensure that the higher rate IPT legislation applies equally to insurance sold by bodies such as protected cell companies. PCCs contain cells that can be owned and run independently and whose assets and liabilities are segregated from the assets and liabilities of other cells as well as the non-cellular or core assets and liabilities of the company. That means that someone could own and run an individual cell but have only a minority interest in the PCC as a whole. Insurance provided by the PCC with certain goods could escape the higher rate of IPT because the cell did not fall within the existing definition of a connected person.

We have successfully identified and are now closing a potentially damaging loophole before significant amounts of revenue can be put at risk. The action is needed, and I am glad that the hon. Member for

Eddisbury welcomes it. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 191 ordered to stand part of the Bill.