The Chancellor outlined tax changes, new reserving rules and VAT issues in a Budget strategy that will affect insurers
Chancellor Alistair Darling delivered his first pre-Budget Report last month, outlining his intentions for next year’s Budget and providing updates on issues and progress reports on consultations.
This year, the insurance announcements in the report focused heavily on life insurance, but there were a number of issues relevant to general insurers and corporate members of Lloyd’s. Mainly these were reports of progress rather than the declaration of a final position.
Here, insurance experts at PricewaterhouseCoopers highlight the six most important areas of the pre-Budget Report. Tax simplification
The Chancellor announced the start of a significant programme of tax simplification, designed to enhance UK productivity and competitiveness.
He mentioned three reviews on tax simplification, all of which may impact on insurers, so interested parties should ensure they are represented on working parties or make direct representations when appropriate.
The reviews will look at:
• How to simplify the VAT rules and administration in the UK and EU
• How anti-avoidance legislation can best meet the aims of simplicity and revenue protection
• How to simplify the corporation tax rules for related companies.
The report provided very little new detail on reserving. To recap, the general insurance reserve rules introduced by s107 of the 2000 Finance Act, which required discounting of reserves and a hindsight calculation to track run-off, were repealed in the 2007 Finance Act. No s107 calculations are required for periods ending on or after 19 July 2007 (the date of Royal Assent). We expect that this will reduce the tax compliance burden on general insurers.
The replacement provisions that were introduced by schedule 11 of the 2007 Act allow a deduction for the technical provisions recorded in an insurer’s accounts, unless Revenue and Customs considers that they exceed an ‘appropriate amount’, a so-called “safe harbour”, below which no adjustment to taxable profit can arise.
Draft regulations defining appropriate amount met opposition within the industry and consultations have been continuing with Revenue and Customs.
The report confirmed that the government is now seeking to agree an ‘appropriate amount’ definition closely aligned to insurers’ normal reserving or solvency methodologies. Revenue and Customs has stated its intention that the definition should ensure that the vast majority of insurers (90%-95%) would not be caught by this new anti-avoidance rule.
If no definition is agreed shortly, it is possible that no new rules will apply in 2007. This is unlikely to cause any problems for insurers and we believe it is important to develop a workable definition.
The Chancellor’s pre-Budget report comments confirmed that the consultation announced in the 2007 Budget is continuing between industry stakeholders, Revenue and Customs, and the Treasury on whether general insurers should benefit from a relaxation of the rules governing how group companies can surrender trading losses to be relieved in another group company.
Insurance groups have provided information to Revenue and Customs and the Treasury to support their contention that they are disadvantaged by current regulation. This because, they say, in most sectors, groups can operate on a divisional rather than subsidiary basis, which means that all losses are in one entity. However, due to regulatory constraints, insurance groups have to operate as separate companies, separate life, general and service companies, for example.
Revenue and Customs and the Treasury are currently analysing this information and intend to continue to consult with companies individually to get a fuller picture.
The industry’s desired outcome is greater flexibility in the ability to use losses, for example, by way of a group tax return or so called ‘knight’s move’ loss use (a sideways surrender of losses brought forward in one company to another company). At present, only current year losses can be surrendered in this way.
Lloyd’s corporate members
In addition to general insurance companies, the issues above have relevance for Lloyd’s corporate members and, as such, suitable adaptations are being developed to ensure the revised rules work effectively for Lloyd’s syndicates.
In addition, a wide-ranging consultation is ongoing regarding various aspects of the taxation of Lloyd’s syndicates and their members. There are a number of differences between the tax regime in Lloyd’s and that which applies to other general insurers reflecting the unique nature and regulatory regime of the Lloyd’s market. The consultation is looking at the differences between these markets from the point of view of creating a level playing field. For example, should Lloyd’s corporate members be permitted an equivalent to a tax-deductible equalisation reserve?
In each of the above areas, progress was noted in the pre-Budget report without any concrete outcomes being identifed.
The Arthur Andersen case, decided in 2005 on the scope of VAT exemption for insurance-related services, continues to be a significant issue for intermediaries and insurers. The judgment led to an EU review of the exemption and the Treasury and Revenue and Customs continue to monitor the progress of that review. They are in talk with finance sector representatives as the review progresses and have committed to providing the insurance industry with sufficient notice of any decision to legislate. It is expected that formal EU proposals for change will be made later this year, followed by negotiations between member states.
It is unlikely that the UK government will take unilateral action on this issue. However, intermediaries should continue to ensure that it is clear in contracts who bears any VAT on their services, should the exemption be narrowed.
Premium tax issues
Revenue and Customs is reviewing the requirement for overseas insurers to appoint a tax representative for insurance premium tax (IPT). As part of this process, a formal consultation was undertaken. The consultation covered the possible introduction of an IPT registration threshold as a possible replacement for the de minimis extra-statutory concession. A summary of the representations made and Revenue and Customs proposals is awaited. IT