Schedule 9

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

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Insurance companies: transfers etc

Amendments made: No. 129, in schedule 9, page 151, leave out lines 12 to 19.

No. 89, in schedule 9, page 159, line 13, leave out from ‘to’ to end of line 14 and insert

‘periods of account beginning on or after 1st January 2007 where the transfer of business or demutualisation concerned took place before 21st March’.—[Ed Balls.]

Question proposed, That this schedule, as amended, be the Ninth schedule to the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I had expected the Minister to rise, because he suggested that he would give further information on transfers, which I think fall within the subject of the schedule. I should be grateful if he could clarify the matters for debate and discussion between HMRC and the Treasury.

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

I am very happy to explain the amendments and the schedule. Schedule 9 deals with the taxation of transfers of insurance business. Government amendment No. 89 makes a minor clarification. Schedule 9 repeals section 83(3) of the Finance Act 1989 and associated rules, which apply to transfers of business. In general the repeal will have effect from an appointed day, which will be set by an order in due course.

Where a transfer of business took place before Budget day the repeal is intended to be effective for any period beginning in 2007. However, the life insurance industry has said that there is some doubt about whether the measure has that effect. To deal with that uncertainty, Government amendment No. 89 puts matters beyond doubt.

As I have said, schedule 9 contains a number of measures to reform the law relating to transfers of life insurance business between insurance companies.  Transfers of business are a common feature within the insurance industry, particularly as the industry consolidates and reorganises. A merger of companies within a group can reduce the cost of capital significantly and make operations more efficient. The Government do not want in any way to stand in the way of such important transactions. Indeed, we are keen to facilitate them and to reduce the administrative and compliance burdens associated with genuine commercial transfers.

Transfers of business have also, however, presented opportunities for some to try to extract profits in untaxed form, against the intentions of Parliament. It has therefore been necessary for the Government to introduce a number of complex measures over recent years to block a succession of schemes designed to avoid tax on a transfer of life insurance business. That has led to the tax rules for transfers of insurance business becoming the most complex part of this very complex area, and there is anecdotal evidence that that complexity is inhibiting genuine commercial transactions. It will come as no surprise, therefore, that simplifying the transfer rules was an important objective for the industry in the consultation process. We want to facilitate that if we can.

Schedule 9 is designed to achieve those twin objectives by facilitating commercially driven transfers and protecting the tax base. The basic principle on which we worked in producing the legislation is that transfers of business should be tax neutral, but only where assets and liabilities pass from the long-term insurance fund of the transferor to the long-term insurance fund of the transferee. Schedule 9 achieves that by clarifying the existing rules and by adding new rules where previously there was only guidance.

To sit alongside those clarified and simplified rules, there is a targeted anti-avoidance rule. That will not affect “plain vanilla” commercial transfers, but it will protect the tax base where there is any attempt to reduce profits or create artificial losses during the transfer process. The TAAR will replace most of the intricate and mechanical anti-avoidance provisions  introduced over previous years, leading to a considerable simplification, as I have explained and on which we had, I think, some agreement a moment ago. The TAAR will operate in association with a clearance process, so that where Her Majesty’s Revenue and Customs is satisfied that obtaining a tax advantage is not a main purpose of a proposed transaction, the TAAR will not be invoked. In addition, the TAAR will not apply where a group can show that one company in that group may have got a tax advantage but there is a corresponding tax disadvantage to another company.

In addition to the measures in the schedule, HMRC will be streamlining its processes where there is an insurance transfer. HMRC officials have talked to the FSA and will be talking to actuaries who make reports to the court on insurance business transfers, to see whether the requirements laid down by them about tax clearances can be made less burdensome on both HMRC and the applicant companies and their advisers.

As with the other schedules, there has been full consultation on the measure, but it is somewhat different with respect to its commencement rules: many of the new rules, including the TAAR, start from an appointed day. There is a power in the schedule to amend the legislation by regulations.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. The Committee will sit again at 4.30, with Mr. Illsley in the Chair. Mr. Illsley will also be in the Chair on Thursday morning. From the schedule laid down by the House for the progress of the Bill, it is clear that we are running behind schedule. I therefore give the Committee notice now that I shall if necessary ask the usual channels to consider timetabling a third sitting on Tuesday 5 June, if that becomes necessary. I mention that now because I have always found that it is convenient to inform hon. Members, and more particularly the staff, who have their lives to plan as well, that that might happen. Hon. Members can then adjust their diaries if necessary.

It being One o’clock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.