Insurance tax
- Introduction
- Competitiveness
- Life Insurance
- Insurance premium tax - anti-avoidance
- Mutual Societies - transfers of business
- Other measures
Introduction
Today's Pre-Budget Report contains a number of measures affecting insurers that
were previously announced, but little if anything that is new. The Government
continues to consult on foreign profits, and the next steps are expected shortly
on controlled foreign company reform and branch profit taxation. Also of
importance to insurers is that HMRC and HM Treasury have re-affirmed the
importance of consulting on the tax regime for life insurers and general
insurers that will apply when Solvency II comes into force.
Specific measures have been put forward on two matters announced last summer -
life insurance apportionments and insurance premium tax anti-avoidance. These
are summarised below, as are the new regulations applying to mergers of mutuals.
Competitiveness
Advisory Group
The Government has announced that it is to convene an Advisory Group on
financial and professional services. This is intended as a smaller forum to
succeed the High Level Group. The new group will be a sounding board for the
Government on its policies relating to the long-term future of the financial
sector. It will also ensure that conclusions from competitiveness reports are
followed through.
It is good that the Government is continuing its high level engagement. We wait, however, to see its output and how this affects future Government policy.
Solvency II
HM Treasury and HMRC continue to consult with industry and others about the tax
impacts of Solvency II for life and non-life insurers. The main discussions to
date are focused on identifying high level options for change to the life
company tax system, following the reform of regulatory returns. It is also
recognised that there are issues for non-life insurers arising from proposed
regulatory and accounting changes, and that these should form part of the
consultation.
HM Treasury and HMRC recognise that there is much work to be done in a short space of time. The issues are fundamental to life company taxation. Non-life issues such as the future for claims equalisation reserves also link to the competitiveness agenda and should remain a high priority.
Foreign Profits
The Government has made two announcements. It will publish, as the next stage in
the consultation on reform of the controlled foreign company (CFC) rules, a
document early in the New Year outlining its views on the shape of a new regime.
There will also be preliminary discussions about the merits of a possible
exemption from UK tax for foreign branches.
The foreign profits package remains of great importance to insurers in terms of competitiveness and compliance obligations. The announcement on discussions about possible branch exemption is welcome, as we believe that these should run in parallel with the consultation on CFCs rather than following after it.
Life Insurance
Non-linked assets: apportionment
The Government announced (in a Ministerial Statement of 15 July this year) that
action would be taken to counter a perceived abuse involving 'manipulation' of
the mix of business in non-profit funds to reduce the tax charge on recognition
of previously unrecognised profits - amounts held in so-called 'investment
reserves'. Draft section 432CA ICTA 1988 published today represents the outcome
of consultation to date between HMRC and the industry on this issue. Because of
the extensive discussion process in the intervening months, it is anticipated
that most companies likely to be affected by the measure will be aware of it,
and will have provided input to the consultation process.
The measure potentially applies to companies with one or more non-profit fund
which also have some with-profit business and which maintain an investment
reserve (an amount showing at line 51 of Form 14 of the Regulatory Return as an
'Excess of the value of net admissible assets') in a non-profit fund. The main
perceived mischief being targeted is that the investment reserve mechanism may
allow companies to recognise amounts which arose in investment reserve in one
year as taxable surplus brought into account in a subsequent year when the
fractions which apportion that surplus between life and non-life business, and
between gross roll-up and other business, are very different because of changes
in the business mix. The broad intention of the legislation, therefore, is that
when amounts held in investment reserve at close 2009 (assuming a calendar year
end company) are subsequently released to surplus, they should be apportioned on
the basis of the 2009 fractions. However, if the investment reserve has been
increased in intervening periods, releases of investment reserve to surplus are
first in effect 'matched' to those increases on a LIFO basis. Surplus brought
into account which cannot be matched either to releases of end-2009 investment
reserves or to subsequent increases is subject to apportionment on the basis of
the 'normal' in-year fractions.
Several points remain to be resolved, most notably whether an election will be
made available for companies to use apportionment fractions based on the opening
(rather than whole-year) 2009 position, and how the legislation should interact
with the complex provisions for transfers of insurance business.
The consultation process has resulted in legislation that is better targeted than the initial proposals tabled by HMRC following the Ministerial Statement. We welcome the consultative approach adopted by HMRC and their willingness to consider alternative suggestions to target the perceived mischief but with minimum collateral damage.
Transfers of Business
As indicated in the HMRC financial services letter accompanying the PBR, a
review of the Transfer of Business rules is ongoing. HMRC have received
representations that section 444ABD ICTA 1988 should be amended to allow a 'Case
I' loss in the transfer in certain circumstances.
Pensions: restricting tax relief for high income individuals
(anti-forestalling)
A consultation document has been issued on the implementation of the restriction
of higher rate relief for pensions. Individuals with an income of over £130,000
are potentially affected.
This previously announced provision will affect the attractiveness of insurers' pension product range. The £130,000 threshold is however a new development.
Insurance premium tax - anti-avoidance
Insurance Premium Tax (IPT) is paid on the gross premium charged under a taxable
insurance contract. Under current legislation, an amount that is charged under a
separate contract and separately identified to the insured falls outside the
scope of the definition of a premium. Following the decision in the recent
Homeserve GB Ltd High Court case HMRC announced in its Revenue and Customs Brief
of 17 August 2009 that it would propose legislation to close the perceived
loophole. New legislation will be introduced in Finance Bill 2010 to amend this
provision by bringing certain fees charged under these separate contracts into
the scope of IPT.
The legislation will apply to insurers' retail non-life business where private
individuals are charged for administration (or similar) services connected to
contracts of insurance. An exception will be made where the administration fee
relates to paying by instalments or by card, or to making amendments to the
insurance contract. The new legislation will have effect for payments made on or
after 9 December 2009.
After consultation with industry this measure has been targeted at personal lines insurance business only. The draft legislation stated that payments on or after 9 December 2009 will be affected, but it is not wholly clear how this will apply to policies in force at this time. IPT accounting is the responsibility of insurers and there are different methods of accounting for the tax. Administration fees received by third parties that were previously excluded will now have to included in the IPT reporting of the insurer and the correct tax point for these fees will need to be identified.
Mutual Societies - transfers of business
The Building Societies (Funding) and Mutual Societies (Transfers) Act 2007
provided the framework to facilitate mergers between different kinds of mutual
societies including Friendly Societies, Building Societies and Industrial &
Provident Societies. New regulations governing the tax treatment of these
mergers came into force on 1 December 2009. These aim to address the tax issues
which existed in relation to mergers between different mutual societies or in
relation to demutualisations.
The new regulations follow extensive discussions between HMRC, industry and
others regarding business transfers and mergers between mutual societies with a
view to ensuring that the tax rules applying to mutual mergers are the same
regardless of the type of merger. The regulations cover capital gains, capital
allowances, trading losses, loan relationships, derivative contracts,
intellectual property and stamp taxes.
We welcome the regulations which remove the barriers to mutual mergers and will facilitate further transactions in the future.
Other measures
Bank Payroll Tax
Bonuses paid to individuals by banks are to be subject to a new levy - Bank
Payroll Tax (BPT). This will apply to banks and building societies on awards of
discretionary bonuses over £25,000. Insurance companies are specifically
excluded from the definition of a Bank and the BPT is only chargeable in respect
of relevant banking employees by reason of their employment as relevant banking
employees. There are detailed rules contained in the draft legislation. The
position for investment managers that are part of a banking group may require
clarification.
Although we do not expect the insurance sector should be affected by this measure, the detailed rules will require careful review - in particular for insurance companies and investment managers that are part of banking groups.
The Banking Code of Practice
For groups that undertake predominantly banking activities the whole UK group is
caught by the scope of the proposed Code, whereas for groups that contain
banking entities but undertake predominantly non-banking activities only the
banking entities are caught. The Code of Practice on Taxation for Banks will
therefore potentially apply to insurance companies that are subsidiaries of
groups that undertake predominantly banking-type activities. These will include
firms listed as banks by the Financial Services Authority; UK subsidiaries of
overseas banking groups; UK branches of overseas banking companies; securities
houses; and building societies as defined by the Building Societies Act 1986.
The Code will also be relevant to other companies that undertake banking-type
activities of predominantly non-banking groups, including insurance groups.
Those that are affected by these measures (ie those banks and banking groups that choose to adopt the Code) are likely to already be aware of them as this proposal has been widely publicised. It will be necessary to co-ordinate with the group tax function and the business as a whole to ensure any obligations are met.
Venture Capital Investment Partnerships
Bonuses paid to individuals by banks are to be subject to a new levy - Bank
Payroll Tax (BPT). This will apply to banks and building societies on awards of
discretionary bonuses over £25,000. Insurance companies are specifically
excluded from the definition of a Bank and the BPT is only chargeable in respect
of relevant banking employees by reason of their employment as relevant banking
employees. There are detailed rules contained in the draft legislation. The
position for investment managers that are part of a banking group may require
clarification.
We welcome a constructive approach to dealing with this practical problem.
