The government has altered earlier proposals to introduce a ‘with-profits tax' on reserve funds in a move which eill leave listed life insurance companies with tax bills worth hundreds of millions of pounds.
According to notification issued by HM Revenue and Customs last week which will make up part of the draft rules for the Finance Bill 2006, two anti-avoidance measures are being introduced to stop life insurance companies from “creating artificial losses or reducing taxable profits” by listing them as assets within the investment reserves of the company.
In a 12-page document entitled Life Insurance Companies: Countering Avoidance the Treasury is looking to extend proposals for a ‘with-profits tax’ to all surplus assets not directly set aside for with-profits policyholders and stop former mutual life insurance companies from “creating artificial losses” by setting aside “excess assets” which may later be paid out to shareholders.
More specifically, the excess assets being pursued relate to former mutual insurance businesses which have “untaxed surplus…used by a non-mutual successor company to meet the cost of bonuses and other expenses” and which are used to reduce the tax bill for the firm but are not reflected in the accounts of the company elsewhere.
Officials at the Association of British Insurers (ABI) say the terms of proposals to be included in the Finance Bill 2006 are complicated and still being analysed, and will affect different companies in different ways, but have been introduced without first consulting the industry so there are concerns plans could be more wide-ranging than first anticipated.
“[HMRC] is presenting it as an anti-avoidance measure but we are unsure how it will affect firms because they haven’t consulted with the industry,” says John Breckenridge, acting head of taxation and accounting at the ABI.
“A number of major insurance companies have said their initial view is it could affect them to the tune of hundreds of millions of pounds while others say they do not expect it to affect them. It depends on how the funds are structured and how they value their investment reserves,” continues Breckenridge.
The HMRC move is thought to be designed to catch former mutual insurance companies which still work on the 90:10 fund apportionment model of a mutual insurer – i.e. those which apportion only 90% of the with-profits funds assets to policyholders – as well as companies with little or no with-profits business but which reduce their tax liabilities by electing to list excess assets for regulatory purposes as the book value of funds rather than declaring their market value.
If plans for the Finance Bill 2006 are implemented, stockmarket-listed life insurance firms could be required to pay tax on “surplus” assets acquired from 29 September 2005 if the funds were created prior to implementation of the Finance Act 2003, and the funds set aside which could be used to pay shareholder bonuses without being subject to tax.
According to a Treasury spokesman, the move will not affect today’s mutual insurers as most firms have already changed their business models to a 100:0 fund and allocate all of their surplus funds to with-profits policyholders.
“There is a difference between reserves and excess assets so this is designed to prevent [firms] from building funds used as taxable losses which have nothing to do with their with-profits funds and statutory reserves,” says the spokesman.
In earlier proposals for the Finance Act 2005, the Treasury had sought to make a change to the taxation of with-profits funds to prevent former mutual insurers from listing excess assets as investment reserves and then later paying out assets to shareholders.
This move is still said to be pending and could still hit with-profits funds which did not shift to a 100:0 surplus assets model. However, insurance companies lobbied to prevent this move at the time as it was thought to have hit policyholders rather than the target shareholder funds which are not paying tax.
Insurers say it is still too early to assess what the likely impact will be on the tax positions of insurance companies.
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