Schedule 9 - Insurance companies etc

Finance Bill – in a Public Bill Committee at 7:15 pm on 28 June 2005.

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Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury 7:15, 28 June 2005

I beg to move amendment No. 104, in schedule 9, page 131, leave out lines 1 to 12.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following amendments: No. 105, in schedule 9, page 131, line 1, leave out from beginning to end of line 12.

No. 106, in schedule 9, page 131, line 5, at end insert—

‘(3A)Where the Treasury by order amend any of the provisions indicated in subsection (3)(a), (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits (Amount (“C”)) then on a subsequent transfer of shareholders’ excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the amounts (“C”) that in any accounting period following the introduction of the order, have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits, and for which no corresponding deduction has already been claimed.

(3B)Where the Treasury by order amend any of the provisions indicated in subsection 3(a) (b) or (c), such that an amount which has not been recognised in regulatory surplus and without the regulations would not have been treated as attributable to basic life assurance and general annuity business, has been treated as fully attributable to basic life assurance and general annuity business, and treated for the purposes of section 89 of the Finance Act 1989 within the policyholders’ share of the relevant profits (Amount (“D”)), then on a subsequent transfer of shareholders’ excess assets, the company shall be entitled when computing the Case I profits, defined in section 89(7) of the Finance Act 1989, to deduct an amount equal to the sum of amounts (“D”) multiplied by the lower rate of tax, and then divided by the mainstream rate of corporation tax, that have not been recognised in regulatory surplus, that have been treated as fully attributable to basic life assurance and general annuity business, and have been treated for the purposes of section 89 of the Finance Act 1989 within the shareholders’ share of the relevant profits for which no corresponding deduction has already been claimed.

(3C)For the purposes of subsections (3A) and (3B), “shareholders’ excess assets” means—

(a)the amount of assets shown in a non-participating fund of the company attributed to the interests of the shareholders of the company as a result of a reattribution exercise, less

(b)the amount of assets used to provide support to the with-profits fund of the same company.’.

I now call Chris Huhne.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Thank you, Sir Nicholas. It is normally pronounced “hewn”, as in rough-hewn, but you gave an alternative pronunciation. [Interruption.] I see that many of us will probably be rejoicing in a different nomenclature by the end of this Standing Committee.

The amendment would have the somewhat radical effect of deleting the powers given to the Treasury under the Bill to amend by order any of the key provisions governing the taxation of life insurance   companies. Why do I suggest anything quite so radical? Let us go back a little to the story of how the provisions in the Bill were first formulated. This seems to be a classic case of a rather desperate Treasury casting about for an easy hit in the corporate sector. For many years, the Treasury has eyed enviously the surplus built up by life insurers over and above what their regulator, now the Financial Services Authority, believes to be the appropriate level of assets needed to meet their obligations to their customers. Such surplus assets could be taxed at a higher rate than a shareholder’s funds than they would if they were to be left undisturbed.

Those surplus assets are clearly defined by the FSA in respect of with-profits business, and they were flagged up as a potential tax base in the pre-Budget report, with draft regulations and a letter on 2 December last year. Now, however, the whole basis of the proposals has changed. Instead of taxing the FSA-defined surplus assets in one part of the life insurance business, Ministers are proposing to tax surplus assets in another part of the business entirely, namely those in non-profit funds. Moreover, the proposal is to do so where the company concerned has taken steps towards a court scheme, separating its own shareholders’ funds from those accruing to its customers. That brainwave has evidently come pretty late, because it only emerged in draft regulations on 17 June.

Please note, Sir Nicholas, that the entire basis of the proposed tax on life insurers therefore changed between December and June. Please note, too, that Ministers have not claimed—because they cannot do so—that these proposals involve any closing of loopholes or abolition of tax avoidance. There is no tax avoidance under the current rules, which are of long standing. There is no scheme involved that has been revealed through tax scheme disclosure. In that respect, I disagree with the remarks made by the hon. Member for Runnymede and Weybridge on Second Reading; he appeared to imply that there might be a little jiggery-pokery on the avoidance front. Not so. All we have is a blameless part of the corporate landscape, innocently tilling its furrows in the savings field, suddenly being set on for an estimated £30 million to £35 million by an evidently indigent Treasury.

Indeed, Ministers were sufficiently embarrassed by that expedient that they introduced a sunset clause on their powers. They can have a go at life insurers’ profits on whatever basis they please, but the blank cheque is to be genteelly constrained to between 1 January 2005 and 1 October 2006, unless they manage to wrest back their scruples and extend the period to 1 October 2007 as allowed by new section 431A(5). If the powers to introduce such a fundamental change in the taxation of life insurers are to go, the sunset clause can go too.

Photo of Edward Balls Edward Balls Labour, Normanton

Given that the Liberal Democrats would not raise the £35 million revenue identified as they oppose the provision, how would they instead fill the   gap? Would they choose to apply their proposal for a new top rate of tax, or has that been withdrawn since the general election?

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I am delighted that the hon. Gentleman has asked me that, because I will come to it later. If he does not get full satisfaction, he will no doubt intervene again. However, I hope that he will first allow me to make a little progress in criticising the Government’s proposals.

The provisions would represent a remarkable raid if it were not for another feature of the HMRC’s enthusiasm, which is the damage that the rules are likely to do to the sound commercial judgment of the market’s main participants. AXA, Legal and General, and Britannic will all be hit as they have separated out such surplus assets and taken steps towards a court scheme. Aviva had intended to do that on sound commercial ground, but if the provision enters into law grounds, but I can safely predict that it will have no intention of doing so. Such a taxation measure will introduce adverse incentives to responsible behaviour that would otherwise crystallise that part of assets owing to shareholders and that part to customers of the concerned companies.

The HMRC has implicitly admitted that the measures are arbitrary and ill thought out, through not just through the application of a sunset clause but in its admission with the draft regulations earlier this month. It said in effect that it was

“intended to replace the temporary rules made by the regulations with a new substantive scheme for apportioning the income and gains of a life assurance company, designed to make the whole system fairer and more in tune with the way that companies operate”.

So there we have it: on the HMRC’s own admission, the regulations are less fair than they could be and are not ideally in tune with the way companies operate, which is why I have said that I will propose more substantive measures in future. The provisions are arbitrary, short term and ill thought out. They introduce the wrong incentives and are sufficiently embarrassing to Ministers to make them promise their disappearance within two years. Considering those qualities, we should encourage their disappearance even earlier: before they ever reach the statute book.

I come now to the point raised by the hon. Member for Normanton—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

Order. Let me say that I am not sure that the question from the hon. Member for Normanton was relevant to the amendments under discussion, but I am prepared to use my discretion. If the hon. Gentleman wants to reply in two short sentences, I will allow him to do so.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I am aware of the time, so perhaps I could also—

Debate adjourned.—[Mr. Watson.]

Adjourned accordingly at half-past Seven o’clock till Thursday 30 June at fifteen minutes past Nine o’clock.