Budget 2009: Round-up

Forecasters anticipated that the budget would reveal the depth of gloom that the UK has found itself in and they were right as borrowing is set to soar. Overall the news for the economy does not look good. The government announced that it will borrow a whopping £175bn over the next year, 12% of GDP. It also said that the economy will shrink by 3.5% in 2009.

Regulation for banks, and the rest of the financial services industry, is certain to increase. The Chancellor has said he will publish wide ranging regulatory reform, increase transparency in the banking sector and implement a single set of accounting rules. The government said it will, in a document to be published before the summer, describe its approach to the future of financial markets and set out actions necessary to achieve it.

Insurers have strenuously lobbied for fairer tax treatment and clarification on the possible taxation of dividends. This was addressed in the budget as the Chancellor announced that foreign dividends received by large and medium groups would be exempt from tax. “The dividend exemption on foreign profits should help build the UK’s battered reputation as a modern base for financial service firms. It is good news that will be adapted in July this year and now we need an early completion of the review of controlled foreign companies rules,” said Peter Vipond, the ABI’s director of taxation.

Alistair Darling also announced plans for a worldwide debt cap on interest so that tax deductions of interest claimed by UK members of a multi-national group would be restricted. But he said financial services firms, which will include insurers, will be excluded from this rule. “The exclusion from restrictions of interest (the debt cap) for financial services firms is the right move. It recognises the unique nature of the sector,” said Vipond.

The Chancellor also announced a series of measures to protect the tax system from abuse, by challenging tax evasion and avoidance. Tax evasion measures will include publication of names of deliberate tax defaulters, an offshore disclosure opportunity and targeted anti avoidance measures as a proportionate response to those who seek to avoid paying their fair share.

Insurers specialising in trade credit insurance will be alleviated of the pressure to provide most of the cover as the government has decided to step in to provide help in the sector. Businesses have been struggling as trade credit insurance, which covers suppliers in the event of a retailer defaulting on payment, has been withdrawn by most of the major providers. But the government has announced a ‘top-up’ trade credit insurance scheme to help UK businesses. Under this scheme, the government will offer ‘top up’ private sector trade credit insurance provision for six months and the scheme is set to be available to around 14,000 businesses. A statement from BIBA said: “BIBA welcomes the Treasury’s initiative to address the reduced levels of credit insurance available to small businesses and is working with the Treasury and the insurance industry to improve access to credit insurance.

“Our members have indicated that credit insurers are making withdrawals from certain sectors of business, which is leading to credit problems for many SMEs who are in a supply chain.

“In order to help small businesses further, we would also like to see credit insurers extend their cancellation provision from a few days to at least one month. This would give businesses more opportunities to obtain information and rearrange their supplies to customers.”

The city will be largely disappointed with the budget. Darling has announced a new top tax rate of 50% for those earning more than £150,000 a year from next April. But commentators feel that this won’t do much: “Raising the top rate of tax to 50% from April 2010 for very high earners (above £150,000) may send out the right political message, but it won’t raise much tax. We have already lost a lot of non-domiciled high earners as a result of last year’s tax changes, and I worry that London’s pre-eminence as a financial centre is at serious risk,” Louise Somerset, tax director of RBC Wealth Management.

The new vehicle scrappage scheme has been upheld in the budget. The government wants to offer £2,000 incentive to consumers buying new vehicles to replace vehicles that are more than ten years old. The Chancellor said the government will set aside £300m for the scheme with funding matched by manufacturers participating in it. It will mean good news for the insurance industry specialising in motor policies as it could increase the number of higher cover schemes for new vehicles.

The government pledged to encourage green energy. Tom Sexton, team leader at Aon Renewable Energy said: “These measures will greatly assist in increasing the viability and profitability of projects to ensure a larger part of the UK’s energy requirements are sourced from wind, wave, tidal and solar developments.

Although, from an insurance perspective, the full effect on pricing will most probably not be seen for another three to five years we expect, with an increase in the size and number of green-power projects, for an increase in capacity in this sector, with more and more sophisticated products on offer."

See next week's Insurance Times for a full analysis.