Schedule 9 - Insurance companies etc

Finance Bill – in a Public Bill Committee at 9:15 am on 30 June 2005.

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Photo of Mark Field Mark Field Shadow Financial Secretary 9:15, 30 June 2005

I beg to move amendment No. 105, in schedule 9, page 131, line 1, leave out from beginning to end of line 12.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss amendment 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.'.

Photo of Mark Field Mark Field Shadow Financial Secretary

Thank you so much for allowing us to move on to amendment No. 105, Mr. Cook. I am somewhat disappointed, however, because I have some notes on amendment No. 104 that I want to touch on, not least because the two amendments are similar. Having stopped in mid-sentence on Tuesday afternoon, the hon. Member for Eastleigh (Chris Huhne), the spokesman for the Liberal Democrats, is not here to continue his remarks. [Interruption.] My hon. Friend the Member for West Suffolk (Mr. Spring) suggested from a sedentary position that the hon. Gentleman might be sorting out his tax credits. It is good to see that some of the greatest brains in the Liberal Democrat party are well organised in such matters, even if it is only for their own affairs rather than elsewhere.

I turn now to business. Time is tight both this morning and this afternoon if we are to get through the remainder of the Bill by 6 o'clock this evening. Amendments Nos. 105 and 106 would affect insurance companies. The Government's plans are set out in schedule 9, which is associated with clause 42. It will come as no surprise to the Economic Secretary to hear that we have had substantial assistance on this highly technical subject from the Association of British Insurers. Although we are not the mouthpiece of any lobbying group, the ABI has expressed legitimate   concerns that we feel should be put on record and debated.

As ever, we are keen to tease out from the Government the precise scope of the proposed changes, because it is clear that, in determining the likely outcome and economic effect of the proposed changes, interpretation will be the key. We Opposition Members also worry that the attractions of saving may be undermined at a time when there is a need for higher levels of private saving and more responsibility on such matters.

As the Minister will be aware, the ABI represents some 400 UK insurers. About 95 per cent. of UK business is handled by ABI members; that amounts to some 20 per cent. of investments in the London stock market. As I know from my constituency, insurance may seem to be based in London EC3; however, it must be said that the term covers savings, pensions and health, life, motor and household insurance, and insurance is a large-scale employer in many of our constituencies.

We accept that the insurance industries should pay a fair level of tax, however ''fair'' is to be defined, but the concern has been expressed that a number of proposals in the Bill are unfair to the industry and—to the extent that that will have an impact on policyholders—likely to be unfair to customers, too. That will reduce the attractions of saving, as I said. Our underlying concern is that Government policy on the taxation of life insurers is by no means coherent. The industry acknowledges that a review of key elements of life tax legislation should be undertaken, with a view to introducing measures in the Finance Bill of 2006, at the earliest. But despite that acknowledgment, there are still some ad hoc changes proposed in the schedule that may have wider commercial effects and raise wider issues.

In its representations, the ABI welcomed the Government's agreement to the introduction of a two-year sunset clause under proposed clause 431A of the Income and Corporation Taxes Act 1988, and to that extent I am confident in what the Government have tried to achieve.

Amendments Nos. 105 and 106 are alternatives. Paragraph 3 of the schedule inserts new section 431A into the 1988 Act, and it introduces a power allowing the Government to alter matters of critical importance to the taxation of life insurance by regulation, rather than through primary legislation. That issue was brought up on Tuesday afternoon. In particular, our concern is that the power allows the Government to change the basis on which income and gains are apportioned between different types of business, and between shareholders and policyholders. It also allows them to change the rates of tax that are sufferable.

It must be noted that there are no limits to what the Treasury can include in the secondary legislation. That potentially gives far too much power to the Inland Revenue and too little protection to the taxpayer. Also, the draft regulations contain no sunset clause to limit the duration of the powers. Those rules will need to be reviewed in next year's Finance Bill in nine months' time. We seek an explanation from the   Government on whether the proposed changes should be introduced by statutory instrument and whether limitations should be placed on what is in such an SI.

It is incontrovertible that the lack of parliamentary scrutiny or consultation is likely to result in badly thought-out or inequitable proposals becoming law. It is in no one's interests for that to happen, and for the law to be overturned in a matter of months at the next opportunity, which would be under a subsequent Finance Bill.

It is essential that the Government explain some of their reasoning. In particular, why do they believe that it is appropriate for such matters to be dealt with in secondary legislation? How will the Economic Secretary ensure proper scrutiny of Inland Revenue written legislation, and why are the Government introducing legislation that will affect the first quarterly instalment in this tax year after that instalment has already been paid? Surely, if the law needs to be changed, that should be done at the beginning of the 2006 accounting period, or even at the start of the 2007 one, if it is to be delayed until it has had full consideration in next year's Finance Bill. It could be brought into being with the other apportioned rules, which apply for a life assurance company.

Amendment No. 106 has been tabled in case amendment No. 105 is not agreed to. Amendment No. 105 would delete most of new section 431A. Amendment No. 106 is an alternative that could be put in place. It seeks to prevent the Inland Revenue and Her Majesty's Treasury being given powers that they can use to levy a charge on excess assets held within a with profits fund. That was touched on in some detail on Tuesday afternoon's sitting and I do not want to go into torturous detail about it now. However, it seems to us that the intention of the proposed statutory instrument was to levy a 30 per cent. tax charge on investment return on those assets. Such a charge would have mostly fallen on with profits fund policyholders and on shareholder ''profits'' that were far from being realised.

As the hon. Member for Eastleigh pointed out, the latest draft regulations—of 17 June—restrict the charge to what are described as ''excess assets''. The term ''excess'' refers to assets that, after obtaining regulatory approval and paying sufficient compensation to the with profits policyholders, have been extracted from the with profits fund, but remain held in the long-term fund, which is normally called attributed estate or attributed orphan estate.

Investment income and gains on that sort of fund under existing rules still benefit partly from the exemption of tax on investment return for pension business, and would normally be taxed at 20 per cent. rather than 30 per cent. It is important to stress—the lobbying that we received supported this point—that the attributed estate is often used to provide crucial capital support to a life assurance company's long-term fund. There are restrictions about how much of it can be taken into shareholder funds.  

This area of taxation is extremely complex. The life assurance industry and tax advisers remain concerned about the lack of knowledge and debate of the ABI's or taxpayers' commercial concerns They have not managed to get this issue addressed. Things would not be like for like in the way in which the excess assets are dealt with from one company to another. There is potential for a punitive taxation effect.

We have had a chance to put these matters on the record. We have debated amendment No. 104, which was a similar amendment, during Tuesday afternoon. I hope that, on that basis, the Minister will at least be able to give us some guidance about what he intends to do.

We also have a concern about the double charge that can arise following implementation of the statutory instrument. Much of this will arise in relation to amendment No. 107, which we will discuss later. Therefore, I will not make too much of this point at the moment, but I hope that the Minister will have some words that will allow us to assuage the concerns of which we have been made aware.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

First, may I apologise to the Chair for being late for these proceedings and for not being able to resume exactly where I left off when the hon. Member for Normanton (Ed Balls) was kind enough to—

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

On a point of order, Mr. Cook. Is it in order for the hon. Member for Eastleigh to show the discourtesy that he has shown to the Committee by ending one sitting in mid-sentence, not arriving to continue it at the beginning of the following sitting and then seeking to resume a speech on an amendment that has now been lost?

Photo of Frank Cook Frank Cook Labour, Stockton North

The amendment has not been put yet. As I understand it—I was not in the Chair at the time—the hon. Member for Eastleigh was stopped by the Committee deciding to end its proceedings at that point. The Committee went away, and the situation is unfortunate. We do not know the reason for his arriving late, but he arrived after the similar amendment was moved by a member of the Opposition. I do not see anything that transgresses ''Erskine May'' or any other Standing Order of the House. We are debating amendment No. 105 and not amendment No. 104. I remind the Committee that the question on amendment No. 104 has never been proposed.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury 9:30, 30 June 2005

On a point of order, Mr. Cook. Again, I apologise for being late. May I ask your advice? I should be pleased to continue my remarks on amendment No. 105, as its effect is exactly the same as that of amendment No. 104. Will you advise me on whether that would be appropriate? Would you prefer me to do otherwise?

Photo of Frank Cook Frank Cook Labour, Stockton North

The Chair's preference has nothing to do with it. It will be eminently sensible for you to   continue doing what I thought you were going to do anyway. Let us get on.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Mr. Cook, your common sense is extraordinary. Thank you very much.

Photo of Frank Cook Frank Cook Labour, Stockton North

My common sense is renowned.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Who could possibly disagree?

To sum up the remarks that I was making on Tuesday evening, I should say that this is a temporary grab for revenue by the Treasury from one sector of financial services—life insurers—and that it is self-evidently no more than opportunistic. It will be interesting to hear Ministers' justifications, given the changes in the tax base that they have introduced in the draft regulations over a short period.

There is no evidence of any avoidance that could have sparked such a sortie into one particular part of the corporate undergrowth. As I have said, the basis of the charge has changed fundamentally. The HMRC has recognised that it is only temporary by binding itself with a sunset clause and a commitment to a new substantive basis for sorting out the potential tax base—namely, those assets held by life insurers that are surplus to what is needed to meet their commitments to their policyholders. The new basis of the charge will take about £35 million from a handful of companies and will stop others from reaching sensible commercial judgments, approved by a court scheme, to apportion assets between policyholders and shareholders, because that would crystallise a large tax charge.

Moreover, as the hon. Member for Cities of London and Westminster (Mr. Field) has just pointed out in another context, such matters are to be determined by Treasury orders, rather than by primary legislation. In our view, that is a very poor basis for such a fundamental tax change.

At the close of proceedings on Tuesday, the hon. Member for Normanton intervened and asked me a number of questions. I hope, Mr. Cook, that you will allow me to make some response to those, as his intervention was not ruled out of order. As I understand it—like the hon. Member for Normanton, I am a newly elected Member, so please correct me if I am wrong, Mr. Cook—we in the Opposition are not allowed to bring forward proposals for alternative means of raising revenue. Those have to be proposed by a Minister of the Crown and accompanied by a Ways and Means resolution. That is unfortunate. The hon. Members to my right, for example, have spent a number of hours in Committee proposing tax cuts without the intellectual necessity of imagining from where they might raise the revenue instead. However, those appear to be the rules.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The hon. Gentleman may not have paid attention to what his party was doing in the last Parliament. When I was a local government spokesman listening to the drivel about local income tax that his party was producing, I do not remember it being shy about proposing alternative ways of raising revenue in that sphere.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

The hon. Gentleman knows the strict proposals as far as tabling new amendments or clauses   to the Finance Bill are concerned. However, Liberal Democrat Members have made an exceptional effort to provide Ministers with an extremely good idea.

With the help of the Clerk, the hon. Member for Normanton will find a new clause. Unfortunately, under the rules we are not able to debate it, but it would have the effect of saving very substantial amounts of money for the Treasury by closing a loophole that was opened up by last year's Finance Act. That loophole is self-invested personal pensions, which under the new rules make it possible to invest in directly held residential property, for example, and in personal chattels. That will be an extremely expensive new measure, and it will come into effect from the beginning of the next financial year.

The hon. Member for Normanton will find that it is possible to make significant amendments to the current proposals, and I hope that he will press for those with the Chancellor of the Exchequer, given his substantial influence in the Treasury building on the other side of the road. For example, I hope that he considers the amendment under discussion—and amendment No. 104—and ponders the potential revenue implications of £35 million. In contrast, the Government would make extraordinary savings if they were to adopt this modest measure.

Photo of Edward Balls Edward Balls Labour, Normanton

The intervention that I made was simply to ask whether the Liberal Democrats were still committed to a new top rate of tax in order to cover the loss of revenue that their proposals would cause.

Photo of Frank Cook Frank Cook Labour, Stockton North

Order. This exchange is very entertaining and quite interesting, but it bears little relevance to amendment No. 105, which is the topic under discussion. I am happy for a bridge to be built between comments made in the current sitting and those made in our last sitting on Tuesday, but we have spent enough time doing so, and we should move on with the issue at hand. Can we discuss amendment No. 105, please?

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Absolutely, and it is precisely the question of how one would pay for amendment No. 105 that makes my point relevant. I am hoping to give some idea of the scale of the proposed reduction in insurance companies' taxation in comparison with the total of the Government's proposed measures by pointing out that revenue to the Consolidated Fund would be reduced by about £35 million. That cost to the Exchequer would be only a small fraction of the at least £500 million per year, building up to even more than that in later years, that the Treasury will lose in tax revenue if it persists with the revision of the rules on self-invested personal pensions. These calculations are directly relevant to the amendment.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am struggling to understand the hon. Gentleman's logic. As I understand it, amendment No. 105 seeks to remove an order-making power. There are good reasons of principle—which I am glad to learn that the Liberal Democrats share with the official Opposition—for resisting the wide extension of order-making powers. However, the hon. Gentleman cannot tell us what the revenue consequences are of an enabling provision that   would give the Treasury the power to make orders. He can speculate, but he cannot put a price on an order-making power.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I am grateful for the hon. Gentleman's intervention. I regret that he has not been brought into the confidence of advisers to the extent of being made aware of the draft regulations tabled by HMRC in this respect. If he had been, he would be able to put a figure on the likely consequences of these enabling measures. That figure is as I have suggested. The calculations of the relative consequences of this amendment—and of the amendment that we tabled, which we are unable to discuss thanks to the rules—are £35 million as against £500 million. The £500 million calculation is based on estimates by a City firm whose business is market research. The Treasury should be worried about that.

It is sensible for me to put my remarks about this on the record, because I believe that the Treasury will return with an amendment to a Finance Bill—if not this one, perhaps the one for next year or the year after—when the full scale of the reliefs under self-investment personal pensions becomes clear and a reality. Does the Minister not think that it would be better to withdraw these proposals, and to return with new and carefully worked out proposals for life insurance on which there has been sensible consultation for the Finance Bill in 2006?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

That was one of the most extraordinary Committee performances. The hon. Gentleman turned up late—perhaps for very good reasons. He then claimed that the Liberal Democrats were unable to come forward with revenue proposals. Those of us who have campaigned against them for years will find that extraordinary, reflecting on the ''Focus'' leaflets that make promise after promise to spend more and more money.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I think that if the hon. Gentleman were to consult the Clerk he would find that the clause that we have tabled is not selected for discussion. That is what I was referring to, so the points that I was making stand.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I have not even come to that bit yet. That is related to the contribution by my hon. Friend the Member for Normanton, not the point that I was just making, and not your statements, Mr. Cook, which are full of common sense as I have already said once this morning. The hon. Member for Eastleigh said that Members of the House in opposition were not able to come forward with revenue proposals. That is misleading.

The Liberal Democrats said immediately after the election that the revenue and spending proposals with which they had gone to the people had suddenly been scrapped and they would have a comprehensive review. No doubt they will advance revenue proposals at some point during this Parliament, all of which will equally lack credibility.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Has the Economic Secretary noticed a pattern emerging with regard to the hon. Member for Eastleigh? He is unable to speak to amendment No. 104 because he arrived too late this   morning and he is unable to debate his new clause because he tabled it too late for consideration.

Photo of Frank Cook Frank Cook Labour, Stockton North

Order. You may, when I allow.

We have had quite enough meandering around amendments that have not been proposed and new clauses that cannot be moved. There was no question but that the new clause would be disallowed, because it arrived too late. It is out of order and not debateable—game, set and match. Now may we let it rest there, please? We have spent far too much time already on something that was inadmissible to the Committee in the first place.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

Thank you, Mr. Cook. However, it would be a great discourtesy to the Chairman and Committee members not to point out that the question of SIPPs, which the Liberal Democrats have continually sought to raise in this Committee, was the subject of a press release issued to The Independent on 29 June. The only issue that the Liberal Democrats want to bring up in this Committee on any clause or amendment is a question that they were unable to debate because they did not submit it in the proper fashion.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

The hon. Gentleman knows perfectly well, as you pointed out, Mr. Cook, that the reason why the new clause cannot be debated is nothing to do with the reason he has given—it is to do with the procedures of the House, which apparently date back to Irish Members being obstructive. I do not know why those procedures are as they are, since the Irish Members left the House in 1921, but that is the history and I regret the fact. Perhaps the Minister would prefer to bring forward some proposals to the Modernisation Committee allowing Opposition Members to table tax-raising measures.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

In the context of relationships within the European Union, I hope that the hon. Gentleman was not launching an attack on our colleagues and good friends the Irish. I am sure that the record will show his contribution to this debate.

Let me put the schedule in context. The hon. Member for Cities of London and Westminster rightly said that this is a complex, challenging area. He was clearly well briefed by the industry for his contribution. Life insurance is a complicated business, as the hon. Gentleman said, and is often made more so by the transactions that some companies engage in with a view to reducing their tax liabilities. Legislation dealing with the taxation of the business can be correspondingly complex.

Before I respond directly to the points made on the amendments, it is important that I describe what this part of the schedule is intended to do. The objective is to improve the way that income and gains of life insurance companies are apportioned between the different types of business that they carry on. Basic life assurance and pension business are the main two types. Apportionment rules are necessary, because the different types of business are taxed at different rates.   There is no factual way of matching most of a life company's assets to a particular type of business. As Conservative Members have acknowledged, the current apportionment rules have weaknesses, particularly when a life company has significantly more assets than it needs to meet its obligations to policyholders. The current rules allow incoming gains on those excess assets to be apportioned to exempt business, or for there to be special rates of tax appropriate to incoming gains that will be used to pay policyholder benefits.

The Conservatives have clearly accepted that there is scope for tax avoidance when genuinely surplus funds are allowed to roll up at a lower rate of deduction and potentially be transferred out for the benefit of the shareholder at a later date. The hon. Member for Runnymede and Weybridge (Mr. Hammond) accepted that on Second Reading.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 9:45, 30 June 2005

I have just consulted my hon. Friend the Member for Cities of London and Westminster and should be grateful if the Minister clarified whether the measure will include mutual insurers, which have no shareholders. Will insurers that have no shareholders be in the bizarre situation of being taxed at the appropriate shareholder rate on the income arising from those funds?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall return to that issue a little later.

Photo of Mark Field Mark Field Shadow Financial Secretary

I see that I am not the only one well briefed down here.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I am pleased that the Conservatives support the measure, but the Liberal Democrats do not even accept that this is a fundamental issue. Recent changes to the regulatory return that every life company makes to the Financial Services Authority make it easier to identify excess assets, so we have an opportunity at this stage to improve the apportionment rules.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Will the Minister clarify that the draft regulations tabled by HMRC do not use the FSA-defined basis of excess assets, because that is in a different neck of the woods for life insurers, and that in fact the basis will have to be defined in the orders?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I confirm that the basis will have to be defined in the orders.

The measure was first announced in the pre-Budget report 2004, when draft regulations were initially published. At that point, the Government accepted that the industry was not happy with the measure as announced in the pre-Budget report—it felt that it would have a much wider effect than intended—or with the proposal to make such a major change at the time by regulation.

The industry was particularly concerned about the short time allowed for consultation on the regulations, which is a very important part of the debate on these amendments. The context is that the industry and the Government have had an ongoing dialogue in an attempt to reach a satisfactory agreement and conclusion. In the context of those negotiations, that consultation and that debate, significant agreement has been reached between the industry and the   Government on a practical and realistic way forward. Given the discussions between the industry and the Government, it is slightly surprising that in Committee we should find that the industry is in a sense encouraging the Opposition to challenge an agreement that it made with the Government. There has genuinely been a listening process and a two-way dialogue.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I should be grateful if the Minister explained why the Treasury is coming forward with measures that are time-limited and temporary. If the discussions with the industry have been as he suggests, why is it not more appropriate for the measures to be brought forward as substantive changes in primary legislation in a properly discussed Finance Bill next year, as we have been arguing? Why the rush?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I shall come to that in the next part of my contribution. If the hon. Gentleman wants to intervene again, I am sure that he will find an opportunity to do so.

The regulations published in draft at the time of the PBR, to which I have already referred, were not made and a process of consultation has happened. The Government have accepted the principle that the changes should be made in primary legislation, but it was realised early on that it was not possible to complete the process in time for the current Finance Bill. Industry representatives themselves, as I have said, have accepted that it is preferable for any changes effective for 2005 to be made by regulation. That is the only practical way of doing it.

The regulation-making power, as hon. Members are aware, is for one year only. We inserted a sunset clause, as requested by the industry. Any longer-term measure will require primary legislation. The hon. Member for Eastleigh has poured scorn on the concept of using a sunset clause, but I shall quote from an Association of British Insurers press release to demonstrate why that is not consistent with what the industry has said. Commenting on the proposed legislation regarding the taxation of surplus assets of life funds immediately after the publication of the Finance Bill, Peter Vipond, ABI director of tax and regulation, said:

''we are pleased that the Government intends to accept our call for a sunset clause.''

The following is a quote from a debate in the Committee of the whole House:

''Even better, the provisions should be subject to a four-year sunset clause to bring them into line with similar provisions in European legislation'',—[Official Report, 13 Jun 2005; Vol. 435, c. 60.]

and this quote comes from Second Reading:

''In all European financial services legislation since the Lamfalussy report, the European Liberal Democrats have proposed—with the support of all the other parties represented in this place a sunset clause on delegated powers.''—[Official Report, 7 June 2005; Vol. 434, c. 1153.]

Both of these quotations are from the hon. Member for Eastleigh.

Photo of Frank Cook Frank Cook Labour, Stockton North

Order. This may be due to newness to protocol, but when an hon. Member is seeking to intervene on another who has the floor, and that hon. Member chooses to continue, it is customary for the intervening Member to resume his or her seat. Let us try to foster that practice.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

As a former Education Minister, I hope our primary school-age children are learning that principle.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

No. I will give way in a minute.

Finally, I have quotation from the hon. Member for North Norfolk (Norman Lamb):

''The flow of new regulation has subsided somewhat, and it is worth noting that my hon. Friend the Member for Eastleigh—until now a Member of the European Parliament—pioneered the use of sunset clauses in provisions under the financial services action plan.''—[Official Report, 19 May 2005; Vol. 434, c. 372.]

So the hon. Member for Eastleigh has associated himself proudly throughout his political career with the appropriate use of sunset clauses, but is coming to this Committee and implying that somehow they are inappropriate. I shall leave it for Committee members to judge the consistency of that position.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

Will the Minister confirm that when he said that the sunset clause in the Bill was for one year only, he was overlooking the potential for the Treasury to extend it by a further year if it decided to do so?

The ways in which sunset clauses are used are legion. It is sensible to introduce a sunset clause as a matter of generality—covering four years in the case of European legislation—to provide a discipline on the body that has the power to use delegated legislation. However, it is not sensible in this circumstance to introduce a sunset clause rather than discuss the measures as properly proposed pieces of primary legislation. The sunset clause is just a figleaf to hide ministerial embarrassment at the fact that they have not got agreement with the industry and therefore have not brought forward substantive proposals.

Photo of Frank Cook Frank Cook Labour, Stockton North

Order. It would seem that another brief seminar in protocol is needed. There is a difference between an intervention and a speech. The latest intervention was definitely becoming a speech. In future, Mr. Huhne, please make short points. You will have the opportunity to respond before the vote, if there is to be one. Let us have brief interventions, please.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The hon. Gentleman's association of figleaf with embarrassment is a matter for him, but I doubt whether we shall make great progress on the debate because he is coming from an entirely different place.

To respond to the hon. Gentleman's original comment on the FSA returns, it was our intention to base the new measure on the changes to the FSA returns. However, the industry has put forward arguments on why the measures in the FSA return may not necessarily be appropriate for tax purposes, and has demonstrated that they might bite harshly in some cases. We are willing to reflect again on the   genuine issues that the industry has raised and respond accordingly if we can reach agreement.

The hon. Gentleman said that much of the comment has been about the effect on with profit funds. On Tuesday, he was not accurate when he implied that the December proposals would not affect the non-profit funds. The proposals clearly identified excess assets on non-profit funds that had been identified in a reattribution exercise, so the hon. Gentleman was wrong to assume that the proposals represent a U-turn. Contrary to what he said on Tuesday, it is now apparent that the with profit funds do not as a rule have clearly identifiable excess assets. However, I can assure the Committee that, should that position change at any stage, we will take action about the holding of excess assets in with profit funds if that were to lead to unfair consequences. That last point might not reassure Aviva, the company to which the hon. Gentleman referred, which is about to embark on a reattribution exercise, but at least it knows that it might be affected whether or not it goes ahead.

It is important to emphasise that there will continue to be consultation with the industry to produce a solution for 2005 that will be introduced by regulation. As has been mentioned, I have written to the Committee with a fuller description of HMRC's current thinking and the proposed regulations. It involves looking at those companies that have specifically earmarked assets as shareholders' assets held in non-profit funds that are available for distribution to shareholders, when appropriate.

The hon. Member for Eastleigh suggested on Tuesday that the measure is unfair because it picks on those companies that have been through a court-approved reattribution exercise, but the draft regulations described in my letter make it clear that there does not have to be a court order or a formal agreement with the regulator. What there has to be is some action by a company that parks excess assets where policyholders will not receive the benefit of them. If a company does that, it is not in a good position to say that the income should be taxed at the rate that applies to income that does go to policyholders. After that, there will be continuing consultation on an appropriate longer-term solution to several other problems with apportionments to make them fairer.

I assure the hon. Gentleman that any changes would be effected by way of primary legislation in a future Finance Bill. The concept of whether the sunset clause could be extended for a second year is extremely important. At the moment, it is our explicit intention to bring forward primary legislation under the Finance Bill 2006. We hope that we will be able to do that. The Government have demonstrated that they have listened thoroughly and responded to the industry's worries. Any measure that increases tax liabilities will never be embraced enthusiastically by the industry, but I hope that it will at least recognise that we have demonstrated a willingness to be flexible.

The hon. Member for Cities of London and Westminster is worried about double charging, which   was the basis of amendment No. 106. I shall explain to him why his concern is groundless. It is likely that the amendment was drafted before the industry had chance to consider closely the draft regulations that HMRC circulated to it and which I have described in my letter. Hon. Members will see from that information that there can be no double charging. The main reason is that the counter-action proposed for 2005 is limited to non-profit funds. In non-profit funds, there is not the same deferral of the recognition of profits from value increases that there are in with profit funds. Both realised and unrealised profits on assets will be brought into account in the period that they arise. That is the key point. Therefore, there is no subsequent transfer; the amendments refer to that, but the concept of subsequent transfer is not relevant.

However, if, despite my putting this assurance on the record, the industry continues to believe, after studying the content of the letter, that there is scope for double charging with regard to the draft regulations, I would welcome it continuing to discuss its concerns with HMRC officials. If it can demonstrate at any point that there is a serious risk of double charging, that will be taken into account in the regulations.

I hope that I have gone some way towards allaying hon. Members' concerns. The regulations will take into account appropriately the worries the industry has expressed to us both previously and during the course of the Committee's deliberations.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 10:00, 30 June 2005

I crave your indulgence, Mr. Cook. The schedule runs to 13 pages, and, in a sense, I wish to address it as if this was a stand part debate, although I will focus on the specific set of provisions under discussion. I want to say something about excess assets, which my hon. Friend the Economic Secretary referred to.

Explanatory note 111 to schedule 9 states:

''The apportionment rules have tended to apportion some of the income and gains on these assets''— that is, excess assets—

''to the policyholders' parts of the life company's business where they have been exempted from corporation tax as referable to pension business''.

I realise that the current HMRC proposals have not been finalised because consultation is still ongoing, but what will be the likely effect on the pensions industry?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I can assure my hon. Friend that we have seriously considered that point throughout the consultation and our deliberations. It is one of the reasons why the process has taken so long; we want to get that absolutely right. I can place on the record the assurance that we believe that there will be no adverse effect on the pensions industry. That is one of the reasons why we believe that, having had this long period of consultation and negotiation, we must get to the stage where we make it clear that the Government are going to proceed in this way. If we continue to defer and put things off, the industry will, understandably, not take us seriously.  

Photo of Mark Field Mark Field Shadow Financial Secretary

I hope that the Economic Secretary can provide an answer to the following question about mutual companies. Given that mutual insurers have no shareholders, will they be subject to shareholder-type tax?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I am happy to deal with that issue. I apologise for not having directly done so earlier, although I thought I referred to it in one of my comments on the remarks of the hon. Member for Eastleigh. The only conceivable effect on a mutual company will be in certain specified and identifiable circumstances: if it has acquired business from a company that is not mutual, and if that other company has carried out the reattribution exercise, the effect on a mutual company in that position will be to ensure that the income from the excess assets will not be attributed to pension business. Any excess assets held by a mutual in that way will not be taxed at the 30 per cent. rate applying to shareholders' income.

Photo of Mark Field Mark Field Shadow Financial Secretary

Let me sum up this fractious debate. I thank all the Members who have taken part in it, including the hon. Member for Wolverhampton, South-West (Rob Marris), who was, as ever, armed with a copy of the explanatory notes. I remind him that we intend to conclude our proceedings at six o'clock tonight, rather than at six o'clock tomorrow night. I am sure that his Whip will have words with him later.

Photo of Mark Field Mark Field Shadow Financial Secretary

The debate has been worth while, but I think that the Economic Secretary was indulging in a little wishful thinking when he said that industry representatives have accepted that the matter has to be addressed by regulation this year. The alternative brought up by all parties is that we delay doing anything until we have looked into the matter properly under the Finance Bill 2006. Notwithstanding the Minister's tentative reassurances, we believe that it is inappropriate to introduce any amendments to current law without the full and proper consultation to which we referred.

For many of the companies affected, the changes constitute a new and potentially significant tax-raising measure. Indeed, our understanding is that the new temporary powers are being introduced largely with the aim of raising a specific amount of revenue set out earlier this year in the Red Book. If the regulation-making powers in paragraph 3 are used in that way, they could amount to retrospective tax-raising legislation, and that would be unfair on the companies affected.

We still have deep concerns about proposals that we think are conceptually flawed. The case for taxing differentially such supposed excess assets has not been made properly. In particular, we understand that the proposals take no account of the sometimes severe constraints imposed, rightly, by the FSA on the transfer of any assets out of the life funds, regardless of whether the assets in question have been earmarked for shareholders. Those constraints exist to ensure the protection of policyholders—that is not open to dispute—but any additional tax burden will inevitably reduce that protection.  

The proposals also appear to represent a change to one of the fundamental bases of life company taxation and to create real potential for double taxation. We will come back to the subject briefly in debate on amendment No. 107. However, I was reassured that the Minister will continue to have dialogue with life insurance companies. I hope that, if there is real evidence of double charging, there will be an opportunity for compensation, or at least a proper debate on the matter.

On balance, we believe there are some important issues of principle at stake under amendments Nos. 105 and 106, and we would like to press the lead amendment to a Division.

Photo of Christopher Huhne Christopher Huhne Shadow Minister, Treasury

I am not sure whether I am allowed to make a couple of general points in response to the Minister. I am certainly grateful for his clarifications, but the reality is that his remarks do not change the fundamental point that we on the Liberal Democrat Benches made, which is that normally it would be proper procedure to bring forward substantive measures in primary legislation.

Photo of Frank Cook Frank Cook Labour, Stockton North

Order. The hon. Gentleman has already touched on that ground. He had ample opportunity to explore and expose the issue, and indeed he did so. There is no advantage to the Committee in revisiting the subject.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 12.

Division number 3 Nimrod Review — Statement — Schedule 9 - Insurance companies etc

Aye: 9 MPs

No: 12 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly negatived.

Photo of Mark Field Mark Field Shadow Financial Secretary

I beg to move amendment No. 107, in schedule 9, page 132, line 38, at end insert

'plus any taxable amount computed in accordance with Section 444AB of this Act'.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss amendment No. 108, in schedule 9, page 133, line 8, at end insert—

'(2BA) The relevant proportion of the excess determined in accordance with subsection (2A) that relates to long-term business that is not life assurance business shall not be included within the excess referred to in subsection (2B)(a) above.'.

Photo of Mark Field Mark Field Shadow Financial Secretary

We can probably deal with these amendments rather more swiftly than we did amendments Nos. 105 and 106, although I notice that the hon. Member for Wolverhampton, South-West has explanatory notes in his grasp, so that might be wishful thinking.

I take on board the broad comments made by the Economic Secretary towards the end of the previous   debate. On double charging, I am reassured that if there is seen to be a major issue in the industry, particularly given that there is likely to be a rather larger overhaul in the Finance Bill 2006, it will be taken into account. I envisage that we will make representations, if necessary.

The idea of amendment No. 107 is to prevent a double charge. We believe that existing anti-avoidance rules tax the transferor where the transferor retains assets on the transfer of long-term business. Owing to the manner in which the regulatory returns work, they will not have been recognised as regulatory and hence will be a taxable surplus.

Paragraph 7 seeks to deny a loss where more liabilities than assets are transferred to the transferee on a part VII transfer. Where a charge arises, we are concerned that it could be duplicated. Typically, the assets transferred when assets are retained in the transferral will be less than the liabilities transferred. The amendment tries to ensure that there will be no double charging.

Paragraph 7 seeks to prevent tax planning where, on the transfer of insurance business from one company to another, a tax loss arises in the transferee owing to their being a deficit of assets in the long-term fund in comparison with the quantity of insurance liabilities transferred. The idea of amendment No. 108 is to prevent a charge applying where the deficit relates to permanent health assurance business, which is taxed separately from life assurance, and where no tax deduction should arise from the planning that the legislation seeks to prevent.

I hope that the Economic Secretary will give us certain assurances. I do not expect him to go over the ground that he covered earlier. It would be useful if he could put it on the record that in the event of specific, unforeseen concerns and a risk of double charging, the Treasury will look sympathetically and urgently. It should ensure that there is no sense of grievance in the insurance industry.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

Amendment No. 107 is misconceived. On amendment No. 108, I have some sympathy with the points that the hon. Gentleman raised, although the amendment does not help to address the issues in a way that would be acceptable. I will explain why in a moment.

I want to explain why amendment No. 107 is misconceived. Section 444AB is about the assets retained by the company losing its business. If such a company had £1,000 of assets and £900 of liabilities, and it retained £100 of the assets, there would be a charge under that section on £100, if all the other conditions of the section are met.

For the paragraph 7 rules to apply, as I have explained, there has to be an excess of the liabilities over the assets transferred to the recipient. That is the key point. So, in relation to the example that I gave, there might be a transfer of £900 of liabilities and only £750 of assets. That would mean that £150 of assets of the transferor had been retained or, more likely, gone somewhere else. They could not have been part of the   section 444AB amount, because we are not talking about the same assets. In this example, the total assets not reaching the recipient would £250 and the amounts taxed would add up to £250 minus the £100 on the company losing the business and £150 on the company receiving it. I use that example to demonstrate why concerns about double charging are not relevant or appropriate, and I hope that that reassures the hon. Gentleman.

Amendment No. 108 seeks to refine the new charge in section 444AC. First, the new charge is likely to arise only rarely, if at all. Transfers of businesses with more liabilities than assets have been made to secure a tax advantage. Once the tax advantage is gone, such transfers are likely to be no longer relevant and to cease.

Any attempt to apportion the charge between different types of a life company's business involves a large element of approximation; that is another key point. In the interests of simplicity, we have sought not to deal separately with the small amount—it is less than 2 per cent. of the industry as a whole—of non-life business carried on by life companies. The hon. Gentleman's amendment attempts to deal separately with that tiny amount of non-life business, but it does not do the job properly. It takes an amount away from the life profits without adding it to the non-life profits. In that sense, the amendment is flawed and cannot be accepted, although the hon. Gentleman has raised a legitimate point.

Even if that flaw were corrected, it is not obvious that the result would lead to an improvement on the approach proposed under the Bill. Because of the different way in which different types of business are taxed, the result will be, most likely—but not definitely—to the disadvantage of more companies than it benefits. On that basis, I hope that the hon. Gentleman will consider withdrawing the amendment.

Photo of Mark Field Mark Field Shadow Financial Secretary 10:15, 30 June 2005

Our intention, obviously, is not to make any companies worse off under amendment No. 108. We have had a reasonable debate and have put some important issues on the record. I certainly gave a wry smile when I heard about the Treasury's passion for doing things in the interests of simplicity; I had not imagined that that was the Treasury's watchword in respect of much of its work over the past eight years. However, we accept that, as couched, amendment No. 108 is probably not sufficient for the job. I hope that if the Minister is made aware of particular concerns about double charging, he will consider the matter sympathetically next year. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Frank Cook Frank Cook Labour, Stockton North

The next amendment on the list is No. 110 to schedule 9.

Photo of Mark Field Mark Field Shadow Financial Secretary

I seek your guidance, Mr. Cook. Rather than duplicating much of the discussion on amendment No. 110 when we come to discuss amendment No. 109, perhaps it would be helpful if we grouped them together. That would, I hope, save the Committee's time and not try its patience.  

Photo of Frank Cook Frank Cook Labour, Stockton North

If that is the Committee's wish, I am content.

Photo of Mark Field Mark Field Shadow Financial Secretary

I beg to move amendment No. 110, in schedule 9, page 135, line 21, at end insert—

'Taxation of structural investments of long-term funds of insurance companies

8 (1) After section 83(2) of the Finance Act 1989 insert—

''(2AA) But subsection (2A) does not require to be taken into account as receipts of a period of account any increase or decrease in value of subsidiary undertakings, nor shall any distribution from a subsidiary undertaking, resident in the United Kingdom, be taken into account in subsection (2A).''.'.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to take amendment No. 109, in schedule 9, page 135, line 22, leave out from beginning to end of line 25 on page 136.

Photo of Mark Field Mark Field Shadow Financial Secretary

The poor Economic Secretary was wondering what would happen, and whether he would have to read the same notes twice, or amalgamate them. I knew that I would have your approval, Mr. Cook, on that basis that the arrangement would save time. We will get down to business.

Amendment No. 109 would leave out the Government's proposed insertion of new section 444ACA into the Income and Corporation Taxes Act 1988. In its place, we seek to insert amendment No. 110, which should have the same effect of closing down the tax planning that the Government, reasonably, wish to prevent. However, we want to avoid the unwarranted tax charge in what are regarded as innocent transactions, and to remove a taxation anomaly in the life assurance tax laws. In short, we believe that the amendments represent a far more straightforward way of moving in the direction that the Government have in mind.

The Economic Secretary will be aware that life assurance companies have two types of investment as subsidiaries held from their long-term funds: other insurance companies, and companies that are holding investment assets, such as property or bonds. Section 83(2) of the Finance Act 1989 currently taxes, in the parent life assurance company, any increase or decrease in the regulatory value of the subsidiary. That has certain unintended consequences, namely that life assurance groups have sought to obtain substantial tax deductions for the write-down in solvency value of such subsidiaries acquired intra-group when there is no equivalent commercial loss. That is normally because the certificate may be held in a long-term fund for a short period prior to a subsequent transaction—for example, because the subsidiary business will shortly be transferred to its parent.

Another unintended consequence is that there is potential for double taxation, as income and gains in the subsidiary are taxed and the resulting increase in value or dividend from the subsidiary would be taxed again, also at 30 per cent., in the parent life assurance company, which would mean an effective tax charge on such income of 51 per cent.—30 per cent. plus 30 per cent. on 100 per cent. minus 30 per cent. tax.  

The quantum of the tax charge that arises from someone undertaking the planning will not equal the deduction that the Government wish to prevent, as one is based on fair value and the other on admissible or regulatory value, and the two are not the same.

We hope that our amendment will remove the double tax anomaly and prevent the structured transactions designed, owing to the difficult wording of section 83(2) of the Finance Act 1989. We hope that we can secure some assurances from Ministers that paragraph (8) does not go any further than closing down the abuse at which it is aimed.

The industry's concern with the existing wording is that shares in the transferor may generally be held in the transferee's long-term fund, to facilitate the part VII business transfer that is contemplated. Given that part VII transfers of businesses, other than those already heavily into run-off, are estimated to cost approximately £10 million in time and costs, not to mention the major drain on management time, no company will wish to undertake such a transfer solely for tax planning purposes. The costs in management and other time are colossal and it will not be used entirely as a tax planning vehicle.

Among the other concerns of the industry, it feels that as part of that transfer there is bound to be a fall in value in the shares of the transferor, as it is effectively reducing its surplus assets by way of a distribution. The rules require that an amount equal to that reduction in fair value is taken into account as a receipt under section 83(2) of the 1989 Act. That section brings into the charge to tax investment the return for life assurance computations, which, as the Minister will know, is calculated by a determination of the shareholder profit to be taxed at 30 per cent., and the taxable profits that shareholders make on writing pensions, overseas, individual savings account and life reassurance business.

The deemed receipt is aimed at negating tax planning. We accept that that is a desirable and acceptable objective by obtaining a tax deduction for the write-down in value of the subsidiary, which does not match an economic loss. The Association of British Insurers has also indicated that it recognises and agrees with the general principle that there should be an anti-avoidance measure in that instance. However, there is a concern—although much will depend on interpretation—that that section is too far cast and would potentially cover a number of transactions and a number of classes of transaction that are not immediately envisaged.

The concern is that where more assets than liabilities are transferred, as should be the case for a solvent insurance company, there will be a reduction in the fair value of the transferor and a charge in the transferee equal to that fair value reduction. That could cause problems, because if an asset is already held in the long-term fund, any write-down prior to 2003 was probably not taken into account and the amount of any write-down would not be determined by reference to fair value, but by reference to regulatory admissible value.  

There is technical flaw in the clause. The amount of any tax deduction obtained in the transferee for a write-down is unlikely to equal the fair value adjustment which will be taxed on the transferee.

I have covered quite a lot of ground. The ABI has been in touch with the Minister in relation to this matter. In summary, its concern is that the clause provides that where there is an excess of assets over liabilities in a business transfer any subsequent trading loss arising in the transferee should be reduced by the   amount of the new capital introduced. The Government believe that that should apply even where the reason for the loss has no connection with the transfer, which will, in effect, treat any loss made after the business transfer as if it were artificially created for avoidance purposes. That is not a sensible way forward.

It being twenty-five minutes past Ten o'clock, The Chairman adjourned the Committee, without Question put, pursuant to the Standing Order.

Adjourned till this day at Two o'clock.