Clause 29 - Insurance contracts: change in accounting standards

Finance (No. 2) Bill – in a Public Bill Committee at 2:15 pm on 14 December 2021.

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

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

With this it will be convenient to discuss that schedule 5 be the Fifth schedule to the Bill.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

Clause 29 introduces a power to lay regulations before Parliament in connection with the new international accountancy standard for insurance contracts, known as IFRS 17, introduced by the International Financing Reporting Standard Foundation. These regulations will allow the Government to spread the transitional impact of IFRS 17 for tax purposes, and to revoke the requirement for life insurers writing basic life assurance and general annuity business to spread their acquisition expenses over seven years for tax purposes. The corporation tax liabilities of insurers are based on their accounting profit. IFRS 17 will apply to companies that prepare their accounts under international accounting standards and is expected to become mandatory for accounting periods beginning on or after 1 January 2023, subject to its endorsement by the UK Endorsement Board.

Depending on the types of insurance business written, adoption of IFRS 17 will create a large, one-off transitional accounting profit or loss for many insurers. The Government expect that spreading these one-off transitional profits and losses for tax purposes will greatly reduce volatility in Exchequer receipts and should also help to mitigate the cash flow and regulatory impacts of the accounting change. This will support the long-term stability of the insurance sector in the UK and contribute to the UK maintaining its position as a leading financial services centre.

The adoption of IFRS 17 will also make it more complex for life insurers writing basic life assurance and general annuity business to undertake the necessary calculations to spread their acquisition expenses over seven years for tax purposes, as currently required. Additionally, commercial changes in the life insurance market mean that the need for this requirement has reduced in recent years. Removing it for all life insurers writing basic life assurance and general annuity business, and instead following accounting treatment for tax purposes, will be a welcome simplification. The details of the final legislation will be informed by a consultation that was published alongside the “Tax Administration and Maintenance” Command Paper on 30 November.

The clause will allow the Government to respond to the potentially large and one-off tax implications caused by the adoption of the new international standard for insurance contracts, IFRS 17. I therefore recommend that the clause and schedule 5 stand part of the Bill.

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

As we have heard, clause 29 sits alongside schedule 5 and refers to insurance contracts and changes in accounting standards. As the Minister has mentioned, the clause has an enabling power that will allow the Government to make provisions in secondary legislation in connection with international financial reporting standard 17, and to revoke the requirement for all life insurance companies to spread acquisition costs over seven years for tax purposes.

The corporation tax liabilities of insurers are based on their accounting profit, and many insurers prepare their accounts under international accounting standards. The new international accounting standard for insurance contracts, IFRS 17, is expected to become mandatory for periods of account beginning on or after 1 January 2023, subject to its endorsement by the UK Endorsement Board. IFRS 17 will affect the timing of recognition of insurers’ profits and losses, and its adoption will create transitional accounting profits or losses, which we understand may have significant regulatory consequences. We recognise that the Government will need powers to be able to deal with the tax implications of IFRS 17.

The removal of the requirement for all life insurance companies to spread their acquisition costs over seven years for tax purposes is a simplification that has been allowed by IFRS 17. We welcome the simplification of tax arrangements and do not oppose the clause, but can the Minister tell us what provision will be put in place for insurers, for whom the change in accounting standards could cause a transitional administrative burden?

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

I thank the hon. Member for her question, but the whole purpose of the clause, which will allow costs to be spread over a number of years, is to make things easier for insurers. I am glad that she is satisfied that the clause is sensible, and I am very grateful for her support for this provision. I ask that the clause stand part of the Bill.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.