Insurance tax summaries and measures
Introduction
Foreign profits
General insurance measures
Life insurance measures
Indirect taxes
Other corporate measures
Introduction
The big headlines from the PBR were largely leaked in advance - a
temporary cut in VAT to 15%, a new higher rate of tax of 45% and reduced
personal allowances for higher rate taxpayers alongside an increase in NIC
for employers and employees of 0.5%.
Other announcements of wider interest to insurers relate to the taxation of
foreign profits.
Insurance specific changes announced are that tax deductible claims
equalisation reserves are to be introduced for Lloyd's corporate members,
and a review is to be carried out to look at maintaining a form of claims
equalisation reserve for other general insurers following the introduction
of Solvency II.
Our view
The announcement on claims equalisation reserves is to be welcomed.
Insurers looking for certainty on the taxation of foreign profits will be
disappointed. Although a dividend exemption has been announced, there are a
great many unanswered questions.
The new rate of 45% and the reduction of personal tax allowances for high
earners, when introduced, will further complicate the comparison between
insurance-wrapped and other savings products.
Foreign profits
A key area of interest for insurers and corporates generally is the
taxation of foreign profits. The intention to exempt dividends was trailed
in the press at the weekend and this has now been announced with limited
supporting detail.
In summary, for Finance Bill 2009:
1. Large and medium sized businesses (not defined) will have most foreign
dividends exempted
2. A targeted anti-avoidance rule will be introduced to prevent abuse of the
exemption
3. A worldwide debt interest rate cap will be introduced
4. The unallowable purpose test will be extended
5. Consequential changes are to be made to the CFC rules
No details are available on the interest cap, the treatment of portfolio
dividends and the consequential changes. A fuller review of the CFC rules
will be carried out but any changes are to be subject to further
consultation and are not likely to be finalised before 2011.
Our view
There are a number of unanswered questions that will be of particular
interest to insurers.
Worldwide debt interest cap: it is not clear how the calculation will deal with
financial traders, or treat preference shares which have been issued to raise
funds.
Dividend exemption: insurers will be particularly interested in the
practicalities and compliance costs of identifying and operating an exemption
for 'most' shares. In addition, Lloyd's members that are currently taxed on UK
portfolio dividends will hope that reform will bring them into line with other
UK insurers.
CFC changes: the longer-term reform will take some years to come into effect,
and in the meantime there will continue to be debate over what the treatment
should be of group reinsurers that carry on genuine economic activity.
Branches: the proposed dividend exemption will risk distorting the tax
comparison between branches and subsidiaries at a time when regulatory and
capital developments are leading insurers to consider actively moving to more
branch structures.
General insurance measures
Claims equalisation reserves: Lloyd's
General insurers outside Lloyd's are required by regulatory rules to
maintain claims equalisation reserves against certain types of loss. Amounts
put into the reserve are tax deductible. The Government has announced that
it will bring in a form of tax deductible claims equalisation reserve relief
for Lloyd's corporate members, where there is no regulatory requirement to
maintain one. The new rules will apply to profits treated as arising in year
ended 31 December 2008 onwards, that is to the 2005 year of account and
earlier run-off years, for which syndicate returns will already have been
made by 1 July 2008.
Our view
This new relief is welcome and follows sustained lobbying by Lloyd's.
There is no further detail at present and it is unclear whether, and if so how,
the relief will apply to SLPs and LLPs. We anticipate that corporate members
will need information from managing agents to enable them to calculate and claim
the relief in their tax returns for year ended 31 December 2008.
Claims equalisation reserves: other general insurers
General insurers outside Lloyd's are required by regulatory rules to
maintain claims equalisation reserves against certain types of loss. Amounts
put into the reserve are tax deductible. The Government has announced that
it will bring in a form of tax deductible claims equalisation reserve relief
for Lloyd's corporate members, where there is no regulatory requirement to
maintain one. The new rules will apply to profits treated as arising in year
ended 31 December 2008 onwards, that is to the 2005 year of account and
earlier run-off years, for which syndicate returns will already have been
made by 1 July 2008.
Our view
This is also a positive development as some insurers have significant amounts in tax deductible claims equalisation reserves.
General insurance reserves
There was no announcement today on the tax treatment of general insurers' technical provisions. Consultation continues on Regulations to define the 'appropriate amount' which will limit the tax deductible amount of technical provisions for the purposes of Schedule 11 FA 2007. We understand that new Regulations will not apply to 31 December 2008 year ends and that HMRC is now aiming to finalise the Regulations by 31 March 2009.
HMRC is currently considering the form of the Regulations and the definition of the "appropriate amount". We understand that draft Regulations may be available for consultation before the end of the year.
Life insurance measures
There were no significant provisions specific to life insurance companies announced in the Pre-Budget Report but a number of general measures are also relevant to life companies.
Qualified Investor Schemes
Specific tax charges on investors with holdings of 10% or more in a
Qualified Investor Scheme (QIS) will be removed from 1 January 2009 in order
to allow those investors to benefit from the regime applied to investors
with smaller holdings and investors in other Authorised Investment Funds.
Previously life insurance companies were exempted from the QIS rules,
allowing them to hold more than 10% in a QIS without incurring the
additional tax charges. Going forward the tax charge will only be applicable
to schemes which restrict investment to certain individuals or companies.
Other PBR changes impacting life companies
The new tax rates for individuals give rise to some complexities with top
slicing relief for individuals earning over £100,000. The changes will
further complicate assessment of the difference in tax treatment between
capital gains and income tax on chargeable events.
Changes will be introduced to prevent a debtor company being taxed on the
profit arising on release of a connected party debt. We will need to see the
legislation to identify whether there are any particular issues for life
companies.
Other potential changes in legislation
There are expected to be changes to deal with some areas where the
legislation has been found not to be working in practice. There are several
areas subject to ongoing discussion with the industry: additions to long
term funds: transfer schemes and s.30 TCGA 1992 (application of value
shifting to the transferor); and venture capital funds where multiple tiers
of funds can cause particular problems. We understand that HMRC is also
considering the position of mutual surplus.
There may also be minor corrections to defective legislation. We hope that
this includes removing the reference in s.85A FA 1989 (Excess Adjusted Case
I Profits calculation) to the now repealed paragraph 21 of schedule 11 of FA
1996: whilst it was intended that the changes in FA 2008 should not change
the treatment of loan relationship deficits it is not clear that the
legislation as drafted achieves this.
AIF Dividends
An additional measure will prevent the corporate streaming provisions in the
AIF regulations from applying at all to investors for whom an AIF dividend
is be a treated as a trading receipt. General insurance companies are not
expected to be included in this legislation and the current anti avoidance
contained within regulation 52 SI 2006/964 will still apply to them. We are
not expecting the position for life companies to change as a result of this
proposal.
Unit pricing
Although we expect the exemption of tax on foreign dividends will apply to
dividends received by life assurance companies this is still to be
specifically confirmed. There will be unit pricing implications if it is
confirmed that the exemption will apply, in particular:
- The dividends should be treated as exempt in the hands of BLAGAB policyholders and the corresponding double tax relief on the withholding tax will have to be written off.
- If the underlying funds are in an AIF, and the underlying funds are treated as receiving exempt portfolio dividends, there may be no tax credit arising from streamlined dividends, effectively reducing returns for GRB funds.
Indirect taxes
Standard rate of VAT
The rate of VAT is to be temporarily reduced from 17.5% to 15% from 1
December 2008 until 31 December 2009.
Our view
This is also a positive development as some insurers have significant amounts in tax deductible claims equalisation reserves.
Insurance premium tax
The rate of VAT is to be temporarily reduced from 17.5% to 15% from 1
December 2008 until 31 December 2009.
Other corporate measures
The main points of interest to insurers are likely to be the following.
Principles based approach to financial avoidance products
A further consultation document has been published with a view to introducing legislation in Finance Bill 2009.
British offshore financial centres
The Government has announced a review of British offshore financial centres, their role in the global economy and their long-term business strategies. This is in the context of growing international pressure to line up standards of financial regulation and to meet international norms with regard to taxation. The independent review will be wider than tax and will consider, among other things, financial supervision and transparency, fiscal arrangements, financial crisis management and international cooperation.