Will tax be the downfall of the London market?

The government’s refusal to lower corporation tax at a recent summit of high-ranking insurers has been seen as a blow to efforts to make the London market more competitive.

It is particularly tough for Lloyd’s chairman Lord Levene, who has been lobbying the government for better tax rates in the UK.

The day before Levene was scheduled to make a presentation on competition and modernisation to members of the high-level group of financial services at 11 Downing Street, treasury minister Kitty Ussher said the issue of corporation tax would not be on the table, citing London as an extremely attractive place to do business.

Many in London’s financial sector, particularly insurers, would be inclined to agree that the market remains strong, but as low tax centres, such as Bermuda, Dublin, Malta and Singapore begin attracting more business, the competitiveness of the UK faces significant challenges.

The lure of the London market has always been the skill and experience of its workers and the opportunities for face-to-face contact.

Andrew Green, a partner at accountancy firm Mazars, said: “If you think about the London market, it’s always been a world leader in insurance and reinsurance and still is in many ways. At Lloyd’s, all service providers, brokers and insurers are within walking distance.”

It’s the same argument used last week by Ussher, who stood by the government’s decision to lower corporate tax from 30% to 28%, and not bow to pressure to reduce it.

But it would it would be dangerous for the Lloyd’s market to rest on the laurels of past success, warned Green.

Over the past several years there has been a small surge of UK insurance and reinsurance entities popping up in countries with low-to-zero taxes and lighter regulation.

Hot spots include Bermuda, Ireland, Switzerland and now even Singapore.

Lloyd’s insurers Hiscox, Omega and Kiln have all redomiciled in Bermuda, lured by the promise of zero corporate tax and less red tape.

Bermuda is said to be an easy place to set up business and for reinsurers, a faster timeframe for creating ‘sidecar’ projects.

Bermuda also bypasses new regulations being considered by the EU competition commission – which impact other low-tax centres within Europe.

Talent force

While Bermuda offers many attractive qualities, it is unlikely to draw the amount of business as London, particularly as it is a small island, without significant infrastructure or the talent force of Lloyd’s.

This is why Ireland, and specifically Dublin, is being considered the more formidable competition. With 12.5% tax, insurers pay half the tax they would in London.

Currently, reinsurers Partner Re, Excel and Max Capital are consolidating their European offices in Dublin.

Green said: “At one time we had the lowest taxes and now we’re among the highest. While others have cut rates, we haven’t.”

Huw Jenkins, tax partner at Pricewaterhouse-Coopers (PWC), said the tax system in the UK did not cater to the cyclical nature of the insurance business.

He said: “The government is looking at ways to improve the tax position of the industry, but feels constrained by not wanting to reduce the tax it takes. Though, as a recent study done by PWC for the ABI shows, the industry does pay significant taxes and more than many other sectors.”

As far as regulation is concerned, Green said the FSA seemed to recognise the need to maker it easier for companies to set up companies in London and get them operating faster.

He said: “There is recognition by the FSA that things need to change.”

But more must be done to get the London market to where it should be, many argue.

Green said there was a need for the London market to closely review its competition and not be afraid to challenge those markets. He said from a UK perspective, corporate tax should be a maximum of 25% and that should continue to be reduced to 20%.

He said: “If we don’t do this we could risk losing business to other locations.”

Green acknowledged it would be impossible for the government to grant tax breaks exclusively to the insurance sector, but said work could be done in creating a specific tax regime that reflected the uniqueness of the insurance business— by considering things such as claims equalisation

If taxes were to be lowered a number of companies could redomicile back to London, experts predict.

Revenue and Customs said the government was eager to continue working with the industry to help it remain competitive and would continue consulting insurers on the issue of tax.

It remains to be seen what that will entail.