§ Mr. Matthew BanksTo ask the Chancellor of the Exchequer if he will make a statement about the taxation of the life insurance business of friendly societies. [20814]
§ Sir George YoungRegulations will be laid before the House shortly which will, among other things, clarify the treatment of expenses in arriving at the taxable profits of a friendly society writing life insurance business.
Tax is charged on the investment income and gains referrable to such business, less the management expenses incurred by the society in the course of that business; but friendly societies enjoy an exemption from tax on the investment return from smaller policies.
296WThis distinction between taxable and tax-exempt business was introduced in 1966. Before then, societies had been able to offer only small-scale tax exempt policies. At that time, it seemed self-evident, both to the Inland Revenue and to the friendly society movement represented by the Friendly Societies Liaison Committee, that to calculate the profits of the taxable business one should take the investment return and expenses related specifically to that new category of business.
This approach was incorporated into guidance issued to societies by the liaison committee and was universally followed in practice for more than 25 years, but recently it has been challenged. It is argued that there is no bar in law to a society setting against the income of its taxable life insurance business expenses incurred not only in that strand of its business but in the pursuit of all of its other activities.
Such an interpretation is clearly contrary to the intention of the 1966 legislation. It would overturn a basis of taxation that has applied across the board for a quarter of a century with universal acceptance and would produce unfair results as between one society and another.
Litigation on this point has recently been initiated and it may be some long time before we have a final judgment. It is not satisfactory to leave so fundamental a point uncertain and the regulations to be laid will put the long accepted basis of taxation beyond question. The regulations will also cover other deductions such as capital allowances on assets used only partly for the purposes of taxable life insurance business.
Because expenses in excess of income and gains can be carried forward without limit of time, the regulations will have to have retrospective effect, but the retrospection will not in practice result in the recalculation of any figures which have already been agreed. Where a society has embarked on litigation, and a hearing by the tax commissioners has begun before today, the amount of the losses available to carry forward will be determined by the courts and not by the regulations.