§ Mr. Matthew Carrington (Fulham)I beg to move amendment No. 87, in page 84, line 20, at end add 'of insurance'.
§ Madam Deputy Speaker (Dame Janet Fookes)With this, it will be convenient to discuss the following amendments: No. 88, in page 85, line 49, leave out from '(8)' to end of line 7 on page 86 and insert—
'Where it would be unlawful in the United Kingdom for a liability of a particular description or costs or expenses of a particular description to be indemnified or paid under or in consequence of a contract of insurance, no deduction may be made under this section in respect of:1562 No. 89, in page 86, line 10, at end add—
- (a) the discharge of any liability of that description;
- (b) any costs or expenses of that description.'.
'(10)(a) For the purposes of this section where a company ("the first company") effects a contract of insurance extending to any other companies in relation to which it can lawfully effect such contract and that contract would if confined to the first company be a qualifying contract of insurance it shall be a qualifying contract in relation to those other companies also and any liability arising in relation to any or all of those other companies shall if it would be qualifying liability in relation to the first company had it arisen in relation thereto also be a qualifying liability in relation to those other companies.(b) This subsection shall apply to any payment made to a taxpayer by the company referred to as the first company in (a) above even if no contract of insurance was actually taken out as envisaged in (a) but would have come within (a) had such contract been taken out'.
§ Mr. CarringtonThe amendments are designed to clarify some of the problems in clause 83. The clause is very welcome, and the subject with which it deals was debated extensively last year in Committee. My right hon. Friend the Financial Secretary has moved a considerable way to meet the needs of industry and the insurance business.
There are some problems with the clause that worry employers and insurers. My amendments are designed to tease out some explanations of the Government's intentions, and they may highlight some of the problems that are foreseen in the implementation of the clause. My amendments were suggested by the CBI and are supported by the British insurance industry. Consequently, they are designed to clarify some of the difficulties in the minds of employers and insurers.
I will go through the intention of the amendments briefly; my right hon. Friend the Financial Secretary may be able to express a view on the intention of the clause in three specific regards. Will he reconsider the clause in the light of experience as it settles down and as the provisions of directors' and officers' liability insurance become more readily used in the market?
Under clause 83, the insurance contract must be separate for it to qualify for tax relief. Furthermore, the contract must be unconnected with any other contract. The problem is that policies are usually associated with the contract of employment of the individual. That is not so much for the benefit of the employer, but for the protection of the employee so that he has some assurance that his employer has taken out the right insurance cover to enable his interests to be protected.
As the clause stands, it seems that that would not be permitted. It would be necessary for a company or an employer to take out separate insurance, which seems to be unnecessarily bureaucratic. I understand that it is important to have some anti-avoidance provision in the clause, but the current wording is unduly restrictive. Is it the Government's intention that employees and employers should take out completely separate insurance policies, or could they still be linked to a contract of employment, which is the normal practice in the industry?
Amendment No. 88 is designed to clarify the intention of the clause, which at present concentrates on whether it is lawful for an employer to take out insurance. Where it is unlawful for an employer to take out insurance, tax relief will clearly not be available. The amendment is designed to carry on excluding uninsurable liabilities and liabilities against which it is illegal to insure. It is possible to imagine a situation where an employer would not be able to take out insurance for one reason or another. The 1563 employer might not be able to do so for legal reasons as much as for anything else but, because of the nature of the liability being insured, the employee could take out insurance in his or her name.
As the clause stands, it appears that if an employer cannot take out insurance, an employee cannot do so in his or her name either. The employee would, therefore, lose the tax deductibility. Clearly, that is undesirable in the sense that an employee would want cover against the risks and, regardless of the position of the employer, should be able to have that cover as though he or she were any other employee of the organisation.
My amendment is designed to enable that to happen. It moves the restriction from the nature of the employer to the nature of the insurable risk. If the risk is one against which it is illegal to insure, it would not qualify for tax deduction. If it is legal but the employer cannot legally insure against it, the employee could still do so.
I should be grateful if my right hon. Friend would clarify the Government's intentions and say whether my interpretation of the clause is correct, or whether the insurance industry is being unduly pessimistic in its interpretation.
Amendment No. 89 is much more simple and covers the problem caused by groups of companies. It is not unusual for employees of the parent company in a group, or of one of its subsidiaries, to be paid by the company that directly employs them, but to serve as a director or in other capacities with other group companies on an unpaid basis. Nevertheless, they take on responsibilities that mean that they should be able to cover themselves with directors' and officers' liability insurance. As the clause stands, it appears that the group would not be able to take out insurance cover for employees on a group-wide basis. Each subsidiary would have to take out separate insurance to cover the one employee who might have multifarious responsibilities throughout the group. I am thinking of a group of companies in which a director of the main board might be employed by and paid as a director of that board, but might serve as a director on any number of other boards in the group. It would seem ridiculous for the subsidiary companies to have to take out separate insurance.
If my interpretation of clause 83 is correct, it seems unduly restrictive. I should be grateful if my right hon. Friend the Financial Secretary could clarify whether that was the intention and my interpretation is correct or whether the industry is again unduly concerned and has no real reason to worry.
I am aware that the problems that I have highlighted are problems of detail in a clause that is greatly welcomed and will simplify the situation for directors' and officers' liability insurance. I am looking for some reassurance and comments from my right hon. Friend the Financial Secretary. Implementation of the clause is likely to be somewhat complex within the insurance industry, however, and I would be grateful for my right hon. Friend's assurance that he will ensure that his officials work closely with the industry during the implementation period to ensure smooth running and to ensure that any unforeseen problems are sorted out with the minimum of difficulty.
1564 Will my right hon. Friend assure us that, if problems cannot be sorted out and it is felt that the clause is unduly restrictive to the insurance industry or employers, the Inland Revenue will keep the matter under review and that, if the problems need to be rectified and legislation is the only means of doing so, necessary legislation will be introduced in next year's Finance Bill?
The clause is widely welcomed. The Government have gone a long way towards meeting the worries of employers in the insurance industry, but I should be grateful if my right hon. Friend could put the final bells and whistles on an otherwise excellent measure.
§ Sir George YoungI am grateful to my hon. Friend the Member for Fulham (Mr. Carrington) for his comments on clause 83 and for the role that he played in getting the reform on to the statute book. I will briefly try to put some bells and whistles on the clause.
I will deal with the three amendments in the order in which my hon. Friend the Member for Fulham did so. I understand his concern that the provisions regarding connected contracts might have been drawn too widely. They are drafted to prevent abuse of the new relief. One obvious example would be when two insurance contracts are taken out, but only one relates to liability insurance and the premiums on the liability insurance policy are artificially weighted to inflate the amount that qualifies for relief.
Amendment No. 87 would still permit those anti-avoidance provisions to operate if both connected policies were contracts of insurance. We have carefully considered whether we could accept the limitation that my hon. Friend proposes, but I am afraid that there would still be scope for abuse of the relief by using contracts other than insurance contracts. For example, an insurance company might provide free cars or holidays for directors of a company under one contract, in return for an inflated premium for liability insurance taken out by the client company for its directors under a connected non-insurance contract. Such arrangements are by no means inconceivable.
The approach of preventing abuse via connected contracts generally, and not merely via contracts of insurance, is precisely that adopted under the private medical insurance relief that we introduced, which has been operating successfully.
I reassure my hon. Friend the Member for Fulham that the provisions are not intended to disqualify insurance contracts taken out alongside a director's or employee's ordinary contract of employment. I have already given my hon. Friend such an assurance in correspondence and I am happy to repeat it to the House. That approach will be incorporated in guidance about the relief, which the Inland Revenue will issue in due course.
I cannot recommend that the House should accept amendment No. 87, but I hope that the assurances that I have given my hon. Friend the Member for Fulham about the way in which the provision will be interpreted will help to meet the concerns that he expressed.
I understand my hon. Friend's continuing concern about the provisions covered by amendment No. 88. He raised the matter in a debate on a similar amendment in Committee and has since been good enough to write to me on the subject. I hope to be able to show that the provision as drafted already meets our policy objectives and to reassure him that his amendment is not necessary.
1565 The guiding principle in clause 83 is to give relief for all work-related liabilities, costs or expenses that can be insured against lawfully. It would be wrong to give relief for costs arising from criminal convictions, so fines and penalties imposed on a director or an employee for a criminal offence, which cannot legally be insured against on public policy grounds, will not be within the scope of this relief. The costs of defending a criminal case, however—whether or not the defence is successful—are lawfully insurable and will be covered under the new relief.
The clause rules out any contract of insurance covering liabilities, costs or expenses into which it is unlawful for a person—an employer—to enter. In contrast, amendment No. 88 would consider the legality of the indemnity against the liabilities, costs or expenses. The approach in the existing provision is preferable because it may not be simple to decide whether an indemnity per se against the liabilities, costs or expenses is lawful, irrespective of who has entered into the contract. It is relatively straightforward, however, to decide whether the person entering into the contract, such as a company, has done so lawfully. Moreover, that is the approach adopted in the Companies Acts and Building Societies Acts as regards whether a company or building society may lawfully purchase and maintain liability insurance for its directors or officers.
That general issue was the subject of debate in Committee. Since then, a further concern has been raised with the Inland Revenue about the scope of the term "unlawful" in this context. That is, whether it would rule out contracts which, although not generally illegal, may be outside the scope of an employing company's powers as set out in its articles of association or internal rules. I am advised that that is not the intention of the provision, nor will it be interpreted by the Inland Revenue in that way. What would be at issue, if the point arose, would be the lawfulness of the contract under UK law generally. I hope that this will provide reassurance for my hon. Friend. On that basis, I hope that he will withdraw the amendment.
I understand that amendment No. 89 seeks to ensure that relief would apply in situations that typically involve a group of companies, where liability insurance is taken out by one company for the group. I reassure my hon. Friend that clause 83 already achieves that, so I do not recommend that the House adopts it.
Clause 83 gives relief for directors and employees, regardless of who effects the contract of insurance. Thus, relief is available where one company in a group takes out insurance covering the employees of another company in the same group, or where an unrelated third party effects the insurance contract. Similarly, where an individual incurs expenditure on uninsured liabilities relating to his work, and that is reimbursed, any tax charge would be cancelled by the relief provided by the clause.
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For example, an employee or director working for several group companies on whose behalf sums were paid out under a policy covering the whole group for a liability that he had incurred from his employment with one company would betreated as receiving emoluments of that amount from that company. But that would be 1566 matched, under the relief provided by the clause, by a tax deduction against those emoluments of an equivalent amount.
In respect of the last two assurances for which my hon. Friend asked, of course we shall keep the matter under review as it beds down and my officials will continue to work closely with representatives of the insurance companies and others, with whom they already enjoy a close relationship. Against that background, I hope that my hon. Friend will not feel moved to press the amendment to a Division.
§ Mr. CarringtonI am grateful to my right hon. Friend for those comments. His reassurances will be welcomed by the industry. As there will inevitably be some lingering doubts about how the clause will work in practice, I am glad that the issue will be kept under review. With that in mind, I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.