§ Mr. Norman Lamont
I beg to move amendment No. 19, in page 40, line 45, leave out from 'Lloyd's' to end of line 47 and insert'and in consideration of the payment of a premium, one underwriter agrees with another to meet liabilites arising from the latter's business for an underwriting year so that the accounts of the business for that year may be closed'.
§ The Temporary Chairman
With this it will be convenient to take Government amendments Nos. 20 and 24.
§ Mr. Lamont
These are technical amendments to clarify the wording of clause 70, which deals with the tax deductibility of Lloyd's reinsurance to close premiums.
Amendment No. 19 revises subsection (1) of the clause to provide a more detailed description of the Lloyd's reinsurance to close arrangements. The effect of the amendment is to put it beyond doubt that the clause is sui generic to Lloyd's reinsurance to close. The criteria for tax deductibility that is set out in the clause are free-standing and independent of case law on insurance companies' provisions.
As my hon. Friends know, one of the points that most concerned Lloyd's was that it should not be taxed on a provisions basis. The point at issue was that one should not have a provisions basis where there is no continuing 1194 entity. The point was that the provisions basis was therefore not applicable to syndicates whose membership was changing each year.
That is the purpose of this amendment. It is only one part of the issues that have arisen with regard to Lloyd's, so it may be convenient if I propose this amendment. There are other amendments on the Paper and we can debate the wider issues that relate to Lloyd's later.
§ Mr. Robert Adley (Christchurch)
In view of what my right hon. Friend has just said, I wonder whether I should make my remarks in a moment. I should like to make a few general remarks, so perhaps my right hon. Friend will way whether it will be convenient for me to do so a little later.
§ Mr. Lamont
That is a matter for you, Mr. Knox, but it may be convenient if we dealt with the amendments one by one and had a debate on clause stand part.
§ Amendment agreed to.
§ Amendment made: No. 20, in page 41, line 2, leave out 'reinsurance'.—[Mr. Norman Lamont.]
§ Sir William Clark
I beg to move amendment No. 21, in page 41, line 5, leave out'at the time it is payable'.
§ The Temporary Chairman
With this it will be convenient to take the following amendment No. 67, in page 41, line 6, at end add'for the avoidance of doubt, the value of the said liabilities shall be discounted to allow for the anticipated lapse of time before they must be paid.'.Government amendments Nos. 22 and 23.
§ Sir William Clark
The purpose of these amendments is to clarify the wording of the test for tax deductibility of Lloyd's reinsurance to close.
There is a lot of loose talk about reinsurance with regard to Lloyd's. I should make it clear to the Committee that I am not a name at Lloyd's; I have no vested interest in Lloyd's and I speak as an independent person. Consequently, what I am saying is of genuine concern to me.
If a syndicate ceases to exist, the risks of that syndicate must be reinsured. A syndicate may have 20 names, and if it ceases it carries forward the contingent liabilities for what it has underwritten and when a different syndicate takes it on, it takes on the reinsurance.
The amendment deletes the wordsat the time it is payable".In my view those words are unnecessary, and I believe that the Inland Revenue agrees with me. The words in the amendment, taken with the words "assessment of the value", might be construed as requiring reinsurance liabilities to be discounted. Llloyd's rules ensure that discounts cannot be given. Consequently, when the syndicate agent, in conjunction with Lloyd's, determines the liability for reinsurance, those future incomes, if they have been discounted, are taken into account.
I understand that it is not the Revenue's intention that discounting should be applied to reinsurance to close for the Lloyd's 1985 to close account, although I understand its concern that the clause should not rule this out if circumstances change.
The problem with the present wording is that it could imply that discounting must necessarily be appropriate for reinsurance to close premiums, and thus run counter to the 1195 Revenue's present intentions. In discussion with Lloyd's, the Revenue has said that there are no technical problems with the amendment and I hope that the Financial Secretary will be able to accept it.
The second amendment is a clarifying amendment. It is a matter of great concern to Lloyd's members, who are taking on uncertain liabilities, that the reinsurance to close premium that they receive should give them adequate protection against loss when the claims are eventually paid. The amount of those liabilities, and indeed their existence, is uncertain and may not be known for many years after the RIC premium is determined. Therefore, it is important that the test for tax deductibility should recognise the fiduciary and/or legal duty of the syndicate agent in determining the RIC figure, and that it is sufficient to give a reasonable assurance to those who are taking on the responsibility for the risks that they will not suffer a loss.
I understand that that principle has been agreed in discussions between the Revenue and Lloyd's and that the wording of the subsection is designed to achieve that. Lloyd's considers that the principle will be set out more clearly if the subsection is changed in the way proposed in my amendment. I understand that the terms of the amendment have been agreed between Lloyd's and the Revenue and I hope that the Financial Secretary will be prepared to accept it.
As I have said, the purpose of the amendments is to clarify the position on reinsurance. One could have a syndicate showing a profit of £10,000 after charging a reinsurance premium of, for example, £10,000. If the Revenue was to say, "Oh no, £10,000 is unreasonable," it could be that a person in the syndicate would be paying tax on deemed income that he would never receive. It is a fallacy to think that the names in one syndicate would be the same as in a second syndicate.
It is for those reasons that I hope my right hon. Friend the Financial Secretary will accept the amendments. The intention is merely to clarify the position between Lloyd's and the Inland Revenue. Under no circumstances should we do anything that would jeopardise the position that we have in Lloyd's, because I remind my right hon. Friend that Lloyd's and other parts of the City keep our economy going to a great extent and our invisibles are an important part of the income of this country.
§ Mr. Blair
The amendment that stands in my name is grouped with the other amendments, and I wish to speak to it. However, I should stress that, as with many aspects of the Finance Bill, I am going into territory with which I am somewhat unfamiliar.
As I understand it, the position is that Lloyd's syndicates will make up their annual accounts on a calendar year basis and that, in effect, the 1985 account will be closed at the end of 1987 and that at that time there will be outstanding claims against the syndicate. Therefore, the syndicate has to close its books but has to pay what is called a reinsurance to close premium to another syndicate that might involve the same or substantially the same individuals.
The reinsurance to close premium is to cover against outstanding claims that there may be against the syndicate. If the reinsurance to close premuim is too high, that artificially reduces the syndicate's profits and has the effect of deferring tax liability. It was that that the Inland Revenue sought to counter. The legal advice obtained was 1196 that the Inland Revenue was unable to question the figures that the syndicate gave in order to judge the reinsurance to close premium.
Clause 70 provides that the amount of the reinsurance "premium shall be allowable only to the extent that it is a" fair and reasonable assessment of the liabilities against which the reinsurance to close premium is insuring.
The difficulty that we foresaw arises out of the meaning of the words in subsection 2:at the time it is payable".As I understand it, the effect of subsection 2 is to allow the amount of the reinsurance premium to be deductible as an expense of the underwriter only to the extent that it is shown not to exceed a "fair and reasonable assessment" of the value of the liabilities in respect of which it is payable. In other words, the value should not exceed a "fair and reasonable assessment" because that will then be used in order to compute the amount of reinsurance premium that is deductible.
I may be wrong but I thought that the wordsat the time it is payable",were included in order to address the problem that there may be certain outstanding liabilities at the end of the year but that they would not have to be met immediately They might not have to be met for a year or two. It is not clear at present whether the provision against which the reinsurance premium is insuring is the actual value of the liabilities or the value taking into account the time when the liabilities accrue.
The purpose of my amendment was to make it clear that the provision made should take into account the time at which the liabilities become due. That will make for a different value from the nominal value of the liabilities. In other words, there may be certain claims that are outstanding against the syndicate that have a nominal value but there should be some allowance for the fact that they may not have to be met until a later date. I would be grateful if the Financial Secretary would clarify that.
Having looked at subsection 2 again, I thought that the wordsat the time it is payablein relation to the value of the liabilities were supposed to achieve that result. However, I may be wrong. In any event, the basis of computation of the value should be clear because that will give rise to the tax deductible loss that is an important part of the reinsurance to close premium.
I hope that I have explained the purpose of my amendment and I hope I have explained my query as to the meaning of subsection 2. It is important that the Financial Secretary answers my queries.
§ Mr. Norman Lamont
I can certainly accept amendment No. 21 tabled by my hon. Friend the Member for Croydon, South (Sir W. Clark). I agree that it would be a useful clarification and it is acceptable to the Government. My hon. Friend touched on the subject of discounting and I confirm that it is not the intention that the clause should be read as automatically applying the principle of discounting for tax purposes for reinsurance to close. I can also confirm that the Revenue will not seek to apply discounting to the Lloyd's 1985 account. How far discounting is appropriate when one is considering the deductibility of a provision is one of those areas where the tax position at present is unclear. One of the purposes of the clause as now drafted is to provide a free-standing 1197 objective test of the deductibility of a Lloyd's reinsurance to close premium which does not have to rest upon the tax law about provisions. Therefore, developments in that area will not, I am advised, have a direct read-across to this clause. Should the law change, it may be that we will consider how far discounting would be appropriate in relation to Lloyd's.
§ Mr. Lamont
If I understood the hon. Gentleman correctly, I think that he does understand what it means. Although he did not give it that name, he appeared to describe it when he was talking to his amendment. It seems that his amendment does have the effect that he wants it to have. I am afraid I had assumed that it was accidental. From his explanation, it appears that he is in favour of discounting. He is in favour of discounting the value of a liability to its present-day value—that is, taking account of future income flows in arriving at the amount necessary to meet future liabilities. That is what he appeared to be describing at one point in his argument.
§ Mr. Blair
I should like to clear up this point. As I understand it, the amount of the reinsurance premium will be based on the value of the outstanding liabilities because that is what is insured against. Presumably, the larger the amount of the outstanding liabilities, the larger the amount of reinsurance-to-close premium. If that is the case, I am worried that there may be a nominal value to liabilities even though the liabilities will not be met for some time. I may be totally wrong about that, but it seems strange that we did not take into account when computing their value the time at which those liabilities are to be met and, therefore, the risk against which one is insuring. If I have misunderstood the position, perhaps the Minister will tell me.
§ Mr. Lamont
As I understand it, the reinsurance to close premium does not at present take into account discounting. That is why the tax treatment is that which we are proposing. I agree that amendment No. 22 would be a useful clarification and it is acceptable to the Government.
The purpose of the subsection is to ensure that the tax deductions are not excessive and also to achieve a proper balance by ensuring that the rules for tax deductibility take due account of the need to protect against a loss those taking on the outstanding liabilities.
That principle is encompassed by removing the wordsneither a profit nor a loss accruesand inserting:a profit does not accrue.That is entirely acceptable to Lloyd's and the Government, and it clarifies the position. Perhaps I have already made it clear to the hon. Member for Sedgefield (Mr. Blair) that we cannot accept his amendment.
§ Mr. Adley
I am a newcomer and an amateur in these things. When I was being shown around Lloyd's, I came across an underwriter who told me that he was dealing with a situation that I gather is not uncommon. It was that in 1898 insurance was taken out at Lloyd's by a United States railway. Just recently it was discovered that the 1198 sleepers on the track were sprayed with creosote in 1898. It is now being claimed in an American court that the spraying of creosote on the sleepers nearly 100 years ago has been deemed to be responsible for loss of value of crops in an adjoining area. Who is to judge, and how will he judge, what is a fair and reasonable assessment under the terms laid down in sub-section (2) of this clause?
§ Mr. Lamont
I am not sure of the point that my hon. Friend is making. We are not here talking about a provisions basis, and I must be careful not to use that term. No one could accept a situation in which the Revenue does not have a locus in examining the reinsurance to close premium. That does not say for a moment that the Revenue knows Lloyd's business as well as Lloyd's does or that the Revenue has an expert view of the appropriate premium for the sort of situation that my hon. Friend describes.
As with any commercial business, the Revenue has to come in and take a broad view about whether deductions for business purposes are or are not reasonable. It has to make that judgment on many businesses within any one industry. That is difficult to do, but the Revenue has to take a broad-brush view. What was at issue in the dispute that we had over Lloyd's was whether, as a result of a legal opinion, the Revenue had a locus in looking at the deductibility of reinsurance to close. In essence, that was all it was about. We put forward a proposition that was not acceptable. We had further discussions and have arrived at a form of words.
I should make it clear that I have accepted all three of the amendments tabled by my hon. Friend. This is not just a form of words, but sets out the principle that the Revenue should have a locus in looking at the deductibility of reinsurance to close. That is the best answer that I can give my hon. Friend.
§ Mr. John Townend
Has not the problem been caused because originally the impression was given that the Revenue knew better than the underwriters? As has been said, experience and expertise are necessary for long-tail insurance and the only person who can make the assessment is the underwriter, not the Revenue. The other point that has been overlooked is that it is rather different from the basis of provisions. That is because, if the reinsurance to close is excessive in the eyes of the Revenue and seems to be a means of tax avoidance, it also means, as my hon. Friend the Member for Croydon, South (Sir W. Clark) said, that the composition of the syndicates varies from year to year.
If there is an abuse of the system, it will mean that the current names have been defrauded for the benefit of future names. If that is the case, the underwriter and the managing agent and everybody involved are in breach of their fiduciary and legal responsibilities to all the names. I hope that my right hon. Friend will be able to assure us that the new clauses resulting from negotiation with Lloyd's will in no way undermine the right of the underwriters to decide the correct amount of the reinsurance to close premium.
§ Mr. Lamont
I am not sure that it is fruitful to go into the history of why this arose and to apportion blame, if that is the right word. Some people might say that the situation arose because a legal opinion was offered which said that the Revenue had no locus. We cannot accept that. The Revenue must have a locus. My hon. Friend the 1199 Member for Bridlington (Mr. Townend) asks if there will still be freedom to fix premiums and resinsurance to close at the appropriate levels. Of course there will: that is a commercial matter, but the level at which these things are fixed must be examined by the Revenue. I am not saying that this is analogous to provisions because it is not and I accept that, but provisions in various financial businesses can be examined by the Revenue and businesses are able to over-provide if they wish or to take a certain view about provisions.
The tax authorities also have a view about the appropriate level of deduction that should be allowed. I can give my hon. Friend the assurance that he seeks. The wording of the clauses has been agreed with Lloyd's and I know that it is satisfied. We are satisfied that we now have this locus and I hope that the arrangement will work well. In no way is it the intention of the Government to harm the business of Lloyd's. My hon. Friend spoke about long-tail business. It is that which makes Lloyd's unique, together with its speed of response and flexibility. It is an extremely valued institution and it is wholly right that we should have a tax regime that takes particular account of its special position.
§ Amendment agreed to.
§ Amendments made: No. 22, in page 41, line 13, leave out 'neither a profit nor a loss accrues' and insert 'a profit does not accrue.'.
No. 23, in page 41, line 14, at end insert
'but he he does not suffer a loss'.—[Sir William Clark.]
Amendment made, No. 24, in page 41, line 18, leave out
'for the purpose of closing'
'in connection with the closing of'.—[Mr. Norman Lamont.]
Question proposed, That clause 70, as amended, stand part of the Bill.
§ 8 pm
§ Sir William Clark
I wish to use the clause stand part debate to ask my right hon. Friend the Minister a simple question. Subsection (3) deals with disallowance of a reinsurance premium from one name to a new name. As I read it, if there is a reinsurance premium of, say, £1,000 and only £800 is allowed, that is agreed between the Inland Revenue and the syndicate. That means that the name in the old syndicate has lost the tax on £200. The new name in the syndicate has to state not that he receive £1,000 but that he received £800. Consequently, he pays tax on only £800.
It seems to me a bit unfair that the new name will have the advantage of the net amount that was allowed to the old name. Can something be done about that? I would have thought that all this talk about fiscal neutrality and the fairness that we want for all taxpayers makes it odd that the disallowance for the old name benefits the new name. The old name has to pay tax and the new name saves tax.
§ Mr. Adley
I shall be rather Irish and declare that I have no interest in Lloyd's. My right hon. Friend the Financial Secretary may recall that on Second Reading I intervened briefly and asked my right hon. Friend the Chief Secretary a question about this matter because I am considering becoming a name. I am still not sure, but I am not asking my right hon. Friend for advice on whether I should so do.
I am only partly reassured by what I have heard this evening. Lloyd's is built on trust and has prospered on the 1200 willingness of people to put at risk most or all of what they possess. However, the action of certain of the United States courts seems fundamentally to be changing the level of risk to which people are putting themselves. My concern is not just for myself if, possibly, in future I become a name, but that first by the bond-washing exercise and, secondly, by this legislation, we may tilt the balance against those people either who arc names and want to remain names or who, like myself, are considering. becoming names.
The interpretation of this clause still causes me a little unease. If I asked my right hon. Friend who was to interpret "fair and reasonable" he would presumably have answered, "The Inland Revenue". That comes down to the judgment of an individual and that judgment, on the basis of this legislation, may be different from that of an inspector in five, 10, 20 or 50 years' time.
I recognise that the clause in the Bill is very much less harmful and damaging than that which was in the previous Bill, and undoubtedly there has been a welcome improvement in communications between the Treasury and Lloyd's in the past few weeks. All that I want to say to my right hon. Friend is: please can we be careful about what we are doing, because the killer of the goose that lays the golden eggs would not be a happy epithet for this or any Government with regard to Lloyd's?
§ Mr. Norman Lamont
My hon. Friend the Member for Croydon, South (Sir W. Clark) referred to subsection (3). which provides that where part of the premium paid is not deductible under subsection (2), there shall he a corresponding reduction in tax on the receipt of' the underwriter to whom the premium is payable. My hon. Friend gave a particular example. The excess £200 would be neither deductible in syndicate one nor taxable in syndicate two. I will have a look at his example to see whether there is anything on which we want to reflect.
§ Sir William Clark
My example was in simple figures. However, if there is a £1,000 reinsurance, £200 is disallowed. That consequently means that £800 is allowable in the computation of the syndicate's profits. The new syndicate has received £1,000 but it is deemed to have received only £800. Consequently, its tax liability has gone down by the tax on £200. This is the anomaly, and it means that the names in the old syndicate are suffering a disallowance and that disallowance is giving a benefit to the new names.
§ Mr. Lamont
I will have a look at that and come back to my hon. Friend.
My hon. Friend the Member for Christchurch (Mr, Adley) wondered about the words "fair and reasonable". There has been considerable exploration of different formulae. I appreciate my hon. Friend's concern about such words, but they have been acceptable to Lloyd's. It is not just a question of how the matter stands in the opinion of an individual tax inspector. The taxpayer has the right to take his affairs to the commissioners and ultimately to the courts if he thinks that the Inland Revenue's interpretation of "fair and reasonable" is not correct.
My hon. Friend asked me and the Government to recognise the unique position of Lloyd's and not to be so over-zealous about tax avoidance, that we damage the interests of Lloyd's and thus of the market. I emphasised at the beginning that our concern has been to establish that 1201 we have the locus to look at the deductibility of reinsurance to claim. That is a principle that nobody has sought to challenge today. I emphasise more forcibly than I have already done that we recognise that Lloyd's is a unique institution. I have referred to long tail business and its flexibility. It is different from other parts of the insurance market. Not only does that mean that it is appropriate that there should be a separate and different regime for such a unique body but that we have to be careful that we do not damage something that is important in the City of London, and that is wholly understood.
§ Sir Brandon Rhys Williams
I think that we ought now to agree that the clause, as amended, should stand part of the Bill. I am not connected with Lloyd's and I am not associated in any way with reinsurance. However, a number of my constituents were gravely disturbed over proposals that were incorporated in the Finance Bill that was presented to the House in March. I tabled an amendment to it which I hoped would alleviate the situation somewhat. I was therefore very pleased indeed when I discovered that there had been movement and when the Bill was presented to the House again, this provision had been substantially changed. I am even more pleased that my right hon. Friend the Financial Secretary has been listening to the arguments of the experts and has accepted a number of amendments which we believe may prove to be satisfactory. I think that we should now give this a try.
I do hope that my right hon. Friend will bear in mind that this is a very sensitive area and it could well be, even now, that what is in the clause as amended may not prove to be entirely right. As he has been so accommodating over this and has approached the matter in a highly commendable spirit, I am sure that we can rely on him, if it is found that the clause, in the form in which we have it in the Committee now, is not entirely satisfactory at some future time, if representations are made, to be prepared to listen and possibly make further amendments. As matters stand, I think that we have made a lot of progress. I am grateful to my right hon. Friend on behalf of my constituents, who I know will be very glad that he has approached this matter in the way that he has. Therefore, I think that it would be right that the clause should now stand part of the Bill.
§ Question put and agreed to.
§ Clause 70, as amended, ordered to stand part of the Bill.
§ Clauses 71 to 73 ordered to stand part of the Bill.