§ Miss Melanie Johnson
I beg to move amendment No. 64, in page 79, line 29, leave out from beginning to "an" in line 30 and insert "Where".
Mr. Deputy Speaker
With this it will be convenient to discuss the following: Government amendments Nos. 65 to 67.
Amendment No. 152, in page 80, line 4, leave out—'such descriptions of general insurer as may be prescribed:'and insert ";Government amendments Nos. 68 to 70.
- (i) such descriptions of general insurer as may be prescribed: or
- (ii) a general insurer who elects to be subject to an arrangement prescribed in regulations which appear to the Board to be appropriate;'.
Amendment No. 153, in page 80, line 10, leave out "prescribed" and insert "commercial".
Amendment No. 154, in page 80, line 10, after "rate", insert "or rates".
Government amendments Nos. 71 to 77.
§ Miss Johnson
Clause 107 deals with tax deductions for general insurance reserves and introduces the principle of discounting. It consists mainly of regulation-making powers, and this use of regulations has allowed for consultation with the insurance industry, which has been undertaken, and which good continues—to good effect. The amendments will allow regulations made under the clause to incorporate a change to the original proposals which was suggested in the course of consultation.
In order to explain the amendments, I will briefly explain the effect of the clause. Regulations made under the clause will introduce a process of recalculation of the tax deduction for a year. If it turns out that the tax deduction exceeded a discounted value of actual costs, additions will be made to taxable profits. The additions 481 will be calculated like interest charges, so the effect will be to charge interest on tax that has been delayed because tax deductions have been too large.
This leads to the question of what should happen if it turns out that a deduction was too low. It is right that this situation should be recognised, alongside the case where a deduction is too high. If a deduction was too low, an amount of interest will also be calculated and it will be given as a tax relief for the insurer.
The consultation paper for the secondary legislation proposed allowing this relief only against interest additions made under the clause, and only in the same year or a later year. In Committee, I agreed that this relief should be made more widely available than was originally proposed, and suggested two options—that relief be available against all trading profits, or that it should be available to carry back to an earlier year.
Industry representatives have suggested that the two options should be combined, with a general right of set-off in the same year, combined with a limited right of set-off in an earlier year. Of the two options, their preference was for an unlimited set-off in the same year. The amendments to the clause will make this change, by providing that interest on overpaid tax will take the form of additional trade expenses. The expenses will be available in the normal way against all taxable profits arising in the same year. If they create a loss, there will be the usual one-year loss relief carry-back.
The amended clause also leaves open the possibility of a limited form of carry-back of relief to an earlier year. This is, however, a matter for secondary legislation, and will be decided following further consultation, along with other matters of detail.
The amendments create an even-handed approach in the way the clause deals with overpayments and underpayments of tax. In this way, the clause will ensure that the tax outcomes are fair to the Exchequer and fair to insurance companies.
§ Mr. Michael Jack (Fylde)
When we discussed this in Committee, concern was expressed that the clause as originally drafted would disadvantage UK insurance companies in comparison with world competitors because of the global nature of the insurance market. In the discussions that were subsequently held with the industry, did the Economic Secretary receive positive assurances from the industry that the amendments addressed the competition issue to its satisfaction?
§ Miss Johnson
Many countries, including the United States, Canada, Australia and Germany, already require discounting for tax purposes. France has rules very similar to our proposals to counter over-reserving. The UK has the lowest rates of corporation tax of any major industrialised nation. The long-term costs of the clause to the industry will be far less than the cost of typical European corporate tax rates, which are about 10 per cent. higher than in the UK. The cost is also much less than the industry would pay if insurance premium tax were increased to typical European rates. Our rates are well under European rates. Companies can choose to base their tax deductions on discounted liabilities. That will cost them more in the short term, but it will reduce or eliminate their long-term costs. They can choose to do that all at once, or to spread 482 the costs over several years. Therefore, the clause will not produce a competitive disadvantage for UK insurers. I hope that that answers the right hon. Gentleman's question.
§ Mr. John Greenway (Ryedale)
I beg the Paymaster General to revisit what she has said because companies do not pay insurance premium tax; consumers do. If I am lucky enough to catch your eye, Mr. Deputy Speaker, I shall acknowledge that the current provision represents a significant improvement on the original proposal. However, such issues are still not entirely resolved to the satisfaction of those of us who are concerned about the continuing competitiveness of the UK insurance industry.
§ Miss Johnson
The point that the hon. Gentleman makes about insurance premium tax is correct. Nevertheless, if we were to raise the rate of insurance premium tax, he would say that that would, in effect, cost the companies money, or that the cost would be passed on to the consumer. The cost is not lost depending on the point at which it enters or leaves the system; it affects the entire system. That point would always be made in such circumstances.
On the general principle of such discounting, there is an increasing acceptance that the proposal represents the right way to proceed. In Committee, I put on record the joint response to the proposal of the International Accounting Standards Committee. Perhaps it is worth while briefly reminding hon. Members of that comment on discounting.
The IASC's steering committee concluded that the use of the present value in measuring general insurance claim liabilities is consistent with the emphasis on information that is relevant and decision-useful. A claim that is payable within one month imposes a higher economic burden than a claim for a similar amount that is paid two years in the future. The use of present value allows financial statements to provide information that differentiates those claims from each other. The steering committee found no basis to exempt general insurance claim liabilities from the present value measurement. That was not a lone voice, as was suggested in Committee.
The IASC's view has been widely endorsed by UK accountants, actuaries and companies. There has been a joint response to the proposals on insurance accounting from the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants in Scotland, the Faculty of Actuaries in Scotland, the Institute of Actuaries and the Association of British Insurers. Their joint comment on discounting was simple. They agree that the use of present value in measuring general insurance claims is appropriate. That is the key issue.
Our large insurance companies agreed with that view. CGNU expressed support for the joint response, and Royal and Sun Alliance commented:We do not think there is any argument for not discounting general business under a fair value basis of measurement of liabilities.There is overwhelming support for the principle of discounting. That is at issue here, and the matter is being dealt with even-handedly in response to those representations.
483 9.30 pm
I appreciate that the hon. Member for Arundel and South Downs (Mr. Flight) has not yet spoken to his amendments, but perhaps I might comment briefly. Amendment No. 152 would allow companies to elect to reduce their tax deductions to a discounted best estimate of liabilities, creating what has been called a safe harbour. In return, a company that so elected would be given immunity from later interest charges. However, that change would not sit well with the other provisions in clause 107, which sets out a wholly automatic approach to determining tax liabilities. The clause would not require matters of judgment to be decided on or argued about between the insurance company and the Inland Revenue. I could go into much more detail in response to whatever points the hon. Gentleman makes, but the amendment would add an element that could be disputed. I suggest that it might be subject to considerable legal activity, which would probably not benefit anyone except the lawyers.
Under amendment No. 153, the discount rate would not be prescribed by secondary legislation. Indeed, it suggests that the legislation should merely specify that the discount rate should be the "commercial" rate. That seems to be a recipe for disagreement. Requiring that the rate be commercial is not good enough properly to describe what is needed and companies, tax inspectors and the courts would have insufficient guidance. To avoid ambiguity, the rate must be prescribed in secondary legislation. Perhaps a commitment is being sought that the discount rate will include an allowance for risk. I await clarification. I gave such a commitment in Committee, but, if that is the issue, I am pleased to do so again and reassure Conservative Members that it holds just as true.
§ Miss Johnson
The allowance for risk in the discounting calculation could be made either by including a margin for error in the undiscounted value and then discounting the result, or by including an allowance for risk in the discounted rate. There may be some combination of the two. If the legislation did no more than specify that the discount rate should include commercial allowance for risk, that would be ambiguous. It would not specify the commercial purpose, as is suggested by a commercial allowance for risk, nor would it deal with the related question of the margin for error. The proper allowance for risk will be prescribed in secondary legislation, along with the determination of a proper margin for error and other matters of detail. Draft regulations will be made available for comment at the appropriate time.
§ Miss Johnson
I have no difficulty in giving the right hon. Gentleman that assurance as we want to achieve 484 legislation that is workable and right. I have given a commitment on the discount rate and the way in which it will be considered.
Amendment No. 154 would insert "or rates" alongside the reference to a discount rate. The amendment is not necessary, but perhaps clarification is being sought and I hope to provide it. I can confirm that clause 107 would allow secondary legislation to specify different rates for different types of business. For example, it would allow discounting to proceed according to a non-sterling rate when the liabilities were denominated in another currency. In view of those assurances, I trust that the amendment will be withdrawn.
§ Mr. Flight
I begin by welcoming the Government amendments and the concessions. Despite those, the industry still feels that clause 107 is damaging to UK competitiveness and, ultimately, not worth the candle of the revenue that it will generate.
The amendments are to permit insurers to treat the negative adjustments arising from under-reserving as expenses of the trade. Those are welcome. The Revenue has also indicated that, if the negative adjustment remains unrelieved, it should be allowed to be carried back against previous positives. It has suggested that subsection (5)(c)(i) and (ii) as amended permits that. It would be helpful if the Minister confirmed that understanding in responding.
What is particularly welcome is that the recognition of risk in the discounting calculation will be on a commercial basis. As well as the references made by the Minister, I mention her letter to my hon. Friend the Member for Ryedale (Mr. Greenway). It states:I agree that the discounting calculation should proceed on a commercial basis, which is why I gave a commitment during the debate that the discount would include a risk margin.I take a few minutes to put on the record a summary of why the industry is still not happy with clause 107 and remains opposed to it in principle. As we know, the clause introduces both discounting and a retrospective recalculation regime for tax purposes for insurers. The proposals create a harsher regime than those applicable to other UK companies, even after the concessions and amendments that have been announced.
Unlike other UK companies, insurers are required to compute claim provisions on the basis of 100 per cent. accuracy, with interest charges where that is not achieved. The Revenue's initial proposals were to allow a small—some 5 per cent.—margin of tolerance. The Revenue has indicated that that margin may not be necessary on the basis of the discount rate taking account of risk, but the industry continues to believe that the discount rate and the margin achieve different, although connected, objectives and that the margin should remain.
The insurance industry, unlike other businesses, will be taxed on its liabilities, which is different from being taxed on its accounts, and required to discount in all circumstances. In our view, the proposals remain harsher than the rules on discounting applying to other insurance markets. Indeed, many other businesses—banking in particular—make reserves, but have no requirement to discount. However, the proposals are harsher in the sense that the ability to write insurance cross-border in European insurance markets and the developments in telephone and e-commerce mean that insurers in other 485 European Union member states must be seen as domestic competitors not subject to these measures, which will apply to UK-based insurers.
While the Government have argued correctly that UK corporation tax rates are among the lowest in Europe, there is a general move to lower company taxation in Europe. As the Government know, Ireland is the main threat to the UK industry; it is rapidly expanding its financial services and the insurance sector, which has not introduced discounting, and it is reducing its corporation tax to 12.5 per cent. as of January 2003.
As was pointed out in Committee, comparisons with insurers in other countries such as the United States are difficult because of the different regulatory rules and more protected domestic markets. The international business, meanwhile, is highly mobile, and the proposals are negative for the continued success of the UK as the centre for both national insurance and reinsurance.
The compliance, regulatory and administrative aspects of the proposals are complex and can lead to uncertainty. They are burdensome and make operating in the UK difficult. The Government have calculated the cost of the proposals to insurers at £250 million, but that does not include the effect on insurers' balance sheets, and therefore the cost of capital.
Under the regime, insurers have two choices: to pay more tax later and recognise a future liability both in their accounts and for regulatory purposes now, or to pay more tax now and set up a deferred tax asset not normally recognised for solvency purposes. With regard to the weakening of the capital base of companies, one leading group estimates that the effect on it will be some £140 million, in line with estimates by other groups.
In summary, despite the Government's welcome attempts to make their proposals more realistic to operate, the proposals are harsh on short-tail business compared with other sectors, and particularly harsh on long-tail, largely international and increasingly mobile lines of insurance, where competitiveness is of the utmost importance.
As the Minister pointed out, our amendment No. 152 is designed to create a safe harbour. Contrary to the hon. Lady's comments, we remain of the view that that is appropriate within the regime that the Government seek to put in place. The amendment would allow insurers to elect for an alternative to the hindsight test in the Government's proposals. The proposed freedom to pay more tax liability will not relieve insurers from the requirement to make retrospective recalculations. Any insurer electing to pay tax earlier can therefore still be subject to prolonged uncertainty about the eventual tax position.
The amendment would allow the industry to explore with the Revenue whether an alternative arrangement might be available as an option. It has been described as a "make your bed and lie on it" approach, and could be based on previous years' experience. The industry's aim is, indeed, to agree a safe harbour arrangement, which would satisfy the Revenue's concerns and protect insurers and pension funds investing in insurance companies from the uncertainty and significant additional compliance costs involved in the retrospective recalculations. Without the amendment, clause 107 would not permit an election for a safe harbour. The amendment permits such an option 486 to be available if subsequent consultation between the Revenue and the industry shows that arrangement to be feasible.
In amendment No. 153, the intent of the word "commercial" is not, as the Minister suggested, to create a confusing situation, but that the rates prescribed should be commercial which, as the Minister kindly confirmed, is the Government's aim. Amendment No. 154 is designed to seek confirmation that more than one rate of discount could be applied, as different rates are likely to be appropriate to different classes of business. The two amendments aim at the same objective.
In short, although there appear to be those in the Treasury or Revenue who are determined to achieve their long-term objective of shifting to a discounting regime, we do not see that in terms of revenue—the Minister made it clear that the £250 million was the total over time, not a per annum figure—that is worth the candle, compared with the damage, albeit not huge, to the international competitiveness of the industry. If, as seems likely, the Government intend to pursue their objective, we look to them to co-operate with the industry, as they have done, to make their proposed new regime as workable as possible and to minimise the damage to the industry's competitiveness.
§ Mr. Greenway
It is some time since I spoke on Report on a Finance Bill. As a Front-Bench spokesman with other responsibilities, I felt it convenient and right to leave my right hon. and hon. Friends on the Opposition Front Bench, who have done an admirable job with the Bill, to deal with the issues of the day that arise from the measures that the Government have brought forward in the Finance Bill. However, as the chairman of the all-party group on insurance and financial services, I have been on the receiving end of probably more concerned lobbying on the issue raised by the amendment than any that I can remember for quite some time.
I am happy to remind the House of my interests in the insurance industry.
§ Mr. Greenway
None of my interests affects the issue that is before us. The insurance broking and intermediary profession, unlike insurance companies, have no interest. The insurance company interest is the interest of us all because most of our constituents are policy holders with those companies.
I shall make a brief contribution. I do not wish to take up the admirable speech of my hon. Friend the Member for Arundel and South Downs (Mr. Flight), who has handled the issue with his typical expertise. Nor do I wish to deny the Minister gratitude that the Government have been listening to the concerns of the industry. I wish merely to ask, now that we have narrowed the Government's proposals down to the small point that they intend to pursue, whether it is worth while to continue with what is proposed.
If, as the Minister and my hon. Friend the Member for Arundel and South Downs say, the amount of revenue that is to be raised is small, what is the point of potentially 487 disadvantaging our general insurance industry, which is one of the great earners on our balance of trade? I am talking of invisibles, but they are important.
I hope that I shall make three telling points. First, the regime that is being imposed is both retrospective and harsher in its nature than comparable regimes in other countries within the European Union. The Minister shakes her head, but that is what I am advised. That must mean that there is a competitive disadvantage. The hon. Lady talked about fair value, but the issue is fair competition. No one denies that there are other mechanisms in place in other member states which we do not have. It is understandable that the Treasury wants in some way to balance things up. Revenue has to be raised, and there has to be fairness in so doing. However, I urge the hon. Lady to view these matters on the basis of fairness and competition.
The second and crucial point is that insurance companies will now be taxed, even on what has been agreed so far, on a basis that is different from their accounts. I do not see the logic of that. I again ask the Minister to consider the mischief that the Government are) to deal with.
The third and most important point of all, given that this is not the final stage of the process, is to ask the Minister to continue to be receptive to contributions and consultations from and with the industry on the final outcome of secondary legislation. I understand that some of the features with which the industry remains concerned can be ironed out. We accept that the Government intend to go ahead, and before the night is over the Bill will receive its Third Reading. The Bill will set out the law with which the industry will have to work. I simply plead with the Economic Secretary not to hamper the competitive advantage that our general insurance industry—one of this country's success stories—enjoys because that would inevitably lead to more business moving offshore.
My hon. Friend referred to e-commerce and internet business, and that is a matter for the future. We are dealing with this issue from an historic perspective and not considering how business will be done in the future. The House should ensure that our great insurance industry remains not just competitive, but capable of competing in every market throughout the world and of maintaining its predominant market share in general insurance in this country. That should be our objective.
I understand that, from time to time, we must consider how insurance companies are taxed. However, we must not hamper them in a way that drives business away and allows competitor companies overseas to gain a bigger share of our market than is justified.
§ Miss Melanie Johnson
So that Opposition Members are clear about the position, let me reiterate what I said in Committee about the costs involved. The hon. Member for Arundel and South Downs (Mr. Flight) remarked on the figure of £250 million. That sum builds up over a 10 or 11-year period and it is the figure per annum from that time.
Hon. Members have referred to fairness. The issue comes down to the fact that the insurance sector uniquely has not had its liabilities discounted previously. That is 488 unique to the United Kingdom and it means that the sector has obtained its tax deductions on a wholly undiscounted basis.
§ Mr. Flight
I wish to make two key points on the fact that the industry is apparently unique. First, the banking industry is a greater maker of provisions against bad debts. Those provisions are sometimes inadequate and sometimes too high but, as far as I am aware, they do not need to be discounted. Secondly, it is the normal practice of the insurance industry to discount its own provisions; they are already discounted. In Committee, the Economic Secretary made the point that the data of the Department of Trade and Industry have generally shown a tendency to under-provisioning and not to over-provisioning as a tax avoidance measure.
§ Miss Johnson
This is getting complicated. I said that the DTI's reports are based on non-discounted reserves, so one cannot draw the conclusions that the hon. Gentleman wants to draw from those reports. I was comparing insurance companies and I said that their position was unique in the UK. At this hour, it is perhaps wise not to start a debate on banking at the same time as a debate on the insurance industry. However, to base tax deductions on the discounted value of liabilities, it is necessary for the tax to move on to a different basis for that account.
The position has been unusual. Although the hon. Gentleman says that, in effect, the companies have discounted in any case, the point is that that has not been a requirement of the system. They have therefore been in an unusual position. He mentioned the way in which the proposals could add significantly to companies' capital requirements on balance sheets However, the clause will give companies a choice and I thought that I had made that point clear. If they wish, they can choose to base their tax deductions on the discounted liabilities. If they do that, they will not be obliged to include any tax liability on their balance sheets through the clause and the amendment. There will be no effect on capital requirements if companies make that choice. If they do not, capital requirements will be affected. However, that is not inevitable.
The hon. Member for Arundel and South Downs also asked for confirmation about the allowance for risk in the discount rate and whether a margin of error would continue to exist. An allowance for risk may be combined with a margin of error. However, two sorts of allowance for risk are related. The existence of a margin of error may therefore have a bearing on the extent of the allowance for risk in the discount rate. It is important to achieve a proper balance in secondary legislation between the different means of recognising risk. There will probably be further discussion with the industry and the Inland Revenue to achieve the right balance. We do not need to determine it today. I hope that that reassures the hon. Gentleman.
Let me revert briefly to safe harbours because I did not argue much of the case on them. I do not believe that the hon. Member for Arundel and South Downs has taken account of a couple of central points. First, a safe harbour depends on the notion of a discounted best estimate. Integral to that notion is some method of determining what constitutes a best estimate. I suggest that that simply moves the question a stage further down the line. It would therefore be a matter of determining the calculation, 489 which could involve extensive debate between insurance companies, the Inland Revenue and possibly the courts. Tax inspectors in the courts are not well placed to make decisions about insurance reserves. Certainty would not therefore ensue.
Let us consider certainty. Even for, for example, oil rigs and nuclear decommissioning, where matters are uncertain, all the provisions are discounted. There should probably always have been discounting in the insurance industry, too. On safe harbours, there is no way of creating certainty for something that is inherently uncertain, namely the insurance business. Companies accept uncertainty from their business. Nobody is certain about future tax charges. Apart from uncertainty about future business results, there is always the possibility of changes to tax law.
Whenever deductions are made for unpaid liabilities, it inevitably adds to uncertainty about future tax. Some uncertainty is inherent in the insurance business. I do not believe that Conservative amendments would have the intended effect of removing the tax uncertainty. However, they have great potential for litigation. They would increase uncertainty and lead to greatly increased costs for the insurance companies and the Inland Revenue.
I hope that hon. Members accept that the assurances that I have given will be helpful to them and the industry. We have reached greater agreement with the industry through our discussions in the past few weeks. I hope that hon. Members will support the amendment.
Amendment agreed to.
Amendments made: No. 65, in page 79, line 33, leave out "and (b)" and insert—'(a) subsection (2) below applies if. No. 66, in page 79, line 35, at end insert—'and(b) subsection (2A) below applies if it becomes apparent in such a period that that amount was insufficient.'.No. 67, in page 79, line 40, at end insert—'(2A) For the purpose of making good to the general insurer the loss occasioned by the deficiency, an amount calculated by applying, for a prescribed period, a prescribed rate of interest to the amount of the deficiency shall be treated as an expense of the general insurer's trade in computing for tax purposes the profits of that trade for the later period of account.'.No. 68, in page 80, line 7, leave out "and (2)" and insert "to (2A)".
No. 69, in page 80, line 8, after "excessive" insert "or insufficient".
No. 70, in page 80, line 9, after "excess" insert "or deficiency".
No. 71, in page 80, line 12, leave out "and (2) " and insert "to (2A)".
No. 72, in page 80, line 17, after "receipt" insert "or expense".
No. 73, in page 81, line 39, leave out—'above is treated as a receipt'and insert—'or (2A) above is treated as a receipt or expense'.No. 74, in page 81, line 47, after "(2)" and insert "or (2A)".
No. 75, in page 82, line 4, leave out "and (2)" and insert "to (2A)".
490 No. 76, in page 82, line 7, leave out—'period of account mentioned in paragraph (a) ofand insert—'first period of account mentioned in'.No. 77, in page 82, line 9, leave out "paragraph (b) of".—[Mr. Allen.]