With regard to insurance companies and gross roll-up business, the ABI submission to the Committee noted that the provisions are the outcome of detailed consultation with the industry. In responding to this debate, does the Economic Secretary share the view that consultation is an important part of the process? If so, are there any particular areas in which that has been the case? The ABI states that the Government have continued to consult on certain points of detail. Will the Economic Secretary outline the key areas that are still to be determined with the ABI and other industry representatives?
In a moment, we are going to debate a series of detailed amendments to schedule 7, which have been—and still are—the subject of consultation. With your permission, Mr. Gale, I will respond to the point about the consultation when we discuss the detail of that schedule.
The broader point that the hon. Gentleman makes is absolutely right. When I participated in debates on the previous Finance Bill a year ago, we stressed the importance of consultation in the area of life assurance and insurance company business, especially given the difficult set of events in autumn 2005. It was generally acknowledged that while some necessary decisions had been made to deal with central tax avoidance, in retrospect, the consultation could have been more effective. As a result of the work that started at that point, we have undertaken extensive consultation in that area.
Last May, Her Majesty’s Revenue and Customs published a consultative document on various technical aspects of the special corporation tax rules that apply to insurance. People who have studied the consultation documents and the legislation will understand that that is a very complex area of tax law. In the 12 months since then, working groups made up of industry representatives, professional advisers, and HMRC officials have discussed at length various options for changing the life assurance company tax framework. The working group set out to identify and discuss areas of the regime that could be simplified, clarified or improved. They embraced policy options and detailed technical solutions and then the detailed consultation on the draft legislation. Therefore, the measures that we are debating both here and under schedule 7 and later schedules and clauses reflect the detailed consultation that has been conducted in a constructive spirit.
From a tax point of view, it was our intention that the outcome of the consultation on the changes would be broadly neutral. Although that is not true for every measure across the piece, this is not a tax-cutting or tax-raising exercise. Consultation work is continuing to which I shall refer later. As the hon. Gentleman said, the ABI has provided considerable time and resources, as have many other industry practitioners.
Commenting recently in the Tax Journal, KPMG said:
“I am sure that we are in a better position, with better legislation in place and on its way, for the consultation and co-operative approach”.
If my hon. Friend were to ask industry representatives, they would undoubtedly say that it is a substantial improvement to, and simplification of, the legislation. However, it is extremely complex.
The Economic Secretary is right that the measure is a simplification as those who remember last year’s debate will accept. Schedule 7 rolls up five different types of business into one category. Will he explain why permanent health insurance still has its own separate taxation scheme?
The hon. Gentleman is right to refer to simplification. I wish to preview the schedule a little. We shall be discussing the amendments in a moment but, as he said, schedule 7 contains a series of measures to simplify complex legislation substantially. It is based on technical consultation that started last May. Under current law, five similar, separate consultations are needed to calculate the profits or losses arising through the insurance company from its pensions business, its overseas life insurance business, its life reinsurance business, its individual savings accounts business and its child trust fund business. A result of having five separate computations is that, when a computation results in a loss in one category, it cannot be set against profits in other categories.
By introducing schedule 7, the clause will merge those five categories of life insurance business into a single new class of business called gross roll-up business. Instead of five separate computations, only one will be required. That means that losses can be offset from one old category and set automatically against profits in another.
Will Economic Secretary clarify his remark about the carry forward of losses? My understanding is that, for old losses, there is an apportionment particularly when those old losses relate to pensions business. Can he confirm that?
I was saying that, instead of five separate computations going forward, only one will be required. Under the new regime, losses arising from one old category will be set automatically against profits of another. I shall answer the hon. Gentleman’s detailed question in a moment.
We have taken time to consider the issues properly. Although the consultation has been very successful and the simplification is welcome, there is one qualification. There is a large bank of unused pension business losses throughout the life assurance industry, so allowing relief for all existing pension business losses against future profits arising from other categories of business would have an Exchequer cost.
The Exchequer set out to make the package neutral. Although that has caused some disappointment in the insurance company, the relief for existing pension business profits will be restricted to the pension business proportion for future and gross roll-up business profits. That is the consequence of our trying to make the change revenue neutral, but we shall review the position to see if our estimates of cost stand up in the light of more recent figures.
Some areas are still under consultation. The amendments to the schedule deal with several detailed points that have arisen from that consultation. We are still considering apportionment of income, transfers of business, contingent loans and funding arrangements, and the structural assets, which are all matters that we need to look at further. I hope that Committee members will see that this is a substantial simplification and that, although we could not deliver everything that the industry wanted, we have gone a considerable way to meeting its concerns.
It is true that, at the outset of the consultation, we were attracted in principle by the additional simplification of six into one by merging the computation for permanent health insurance as well as the other categories that I mentioned. However, PHI is assessed on a different basis from the other five categories, which would make the merger process much more complex. Also, detailed work done during the consultation process established that six into one would have had a much greater Exchequer cost than we had previously believed. In our judgment, the combination of introducing greater complexity plus the Exchequer cost outweighed any additional simplification from six being merged into one.
The option of adding PHI to the newly merged gross roll-up category is not ruled out. We may be able to consider that in future Finance Bills, but the combination of additional complexity in meeting the test of my hon. Friend the Member for Wolverhampton, South-West plus Exchequer cost and our desire for neutrality meant that, following the consultations, we were not able to make the change. I commend the clause to the Committee.