Clause 38

Finance Bill – in a Public Bill Committee at 12:45 pm on 22nd May 2007.

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Insurance companies: basis of taxation etc

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

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

Briefly, I do not know whether the Economic Secretary plans to make a comment on the basis of taxation for insurance companies, but as I understand it, the arrangements will mean that there will be one basis of taxation. Previously, HMRC was able to alter the basis of taxation in particular circumstances from what is described as “I minus E”. Will the Economic Secretary explain the circumstances in which that would have happened and why? When the Treasury, or HMRC, no longer has the ability to alter the basis of taxation, what will be the effect on revenue?

Photo of Edward Balls Edward Balls The Economic Secretary to the Treasury

Schedule 8 and clause 38 carry on the process of simplification that I explained in my earlier comments. In particular, the measures abolish what is known as the Crown option—the ancient rule under which an HMRC officer can, even in these days of self-assessment, decide whether a life insurance company should pay tax on a trading profits basis or on the I minus E basis that nearly always applies to such companies. The current system has been part of the life insurance tax rules since 1915.

When HMRC published its technical consultation document in May 2006, there was a small passage about the Crown option. It became clear from the responses to the document that the uncertainty of not knowing when the Crown option would be exercised was causing problems for the life insurance industry, especially in the calculation by a company’s actuaries of its embedded value profits. There are ways for insurance companies to show more realistic profit figures than those that are given by the regulatory accounting rules of the Financial Services Authority. They require the actuary to predict the tax treatment of the business over the coming decade or so. The complete change of basis that is caused if the Crown option is exercised plays havoc with those calculations. HMRC and the industry have together devised a new approach to replace the Crown option, to which schedule 8 gives effect.

The schedule sets out unequivocally, with no element of choice for either HMRC or companies, the circumstances in which a company will be assessed on the trading profits basis. They are restricted to two types of specialist business. Pure reinsurers—companies that do reinsurance business only in the market—will, as they are now, always be taxed on the trading profits basis. The same will apply to companies whose only business is gross roll-up business, which we discussed in relation to schedule 7. All other business that is not gross roll-up business, such as ordinary life assurance business with UK residents, will be taxed only on the I minus E basis.

Schedule 8 sets out how changes between the two bases will be handled, which is particularly relevant for any change of basis that is caused by the schedule itself. There are a number of transitional provisions. As part of the agreed package, the schedule improves the mechanism for ensuring that the I minus E basis of taxation results at least in the taxation, at mainstream corporation tax rates, of the life insurance company’s profits that are not being accrued for policy holders.

The measure also ensures that losses and other reliefs that used to be permanently lost when there was a change from the I minus E basis to the trading profits basis are instead preserved and are restored if there is a subsequent change back to the I minus E basis. That change has been requested by and is particularly welcomed by the life insurance industry.

As a result of extensive consultation, the schedule provides a certain, modern and robust set of rules by which to decide basic questions about the taxation of life assurance companies in a way that does not have an overall revenue cost to the Exchequer. The rules will provide greater certainty. The life assurance sector and its taxation are very different from other parts of the economy. In answer to the question on why that sector is treated differently regarding losses that are carried  back, let me say that it is one consequence of the I minus E regime for life insurance taxation. Another consequence of those rules is that we have to have different rules for the way in which losses are carried back. I hope that that answers hon. Members’ questions.

Question put and agreed to.

Clause 38 ordered to stand part of the Bill.