Friday Round Up

Various bits and pieces and links.

The finance Bill is expected to have its report stage on the 1st July and its 3rd reading on the second 2 July.  As per  post of 22nd March this means the Finance Bill will have been substantively enacted on the 2nd July; so the rate changes included in the Bill will not need to be used in financial statements for periods ended 30th June 2013.

http://services.parliament.uk/bills/2013-14/finance.html

The tax transparent fund regulations have now been finalized:

http://www.legislation.gov.uk/uksi/2013/1388/contents/made

http://www.legislation.gov.uk/uksi/2013/1400/contents/made

And not my area but there has been a consultation issued on the lifetime allowance

https://www.gov.uk/government/consultations/pensions-tax-relief-individual-protection-from-the-lifetime-allowance-charge

New Life Assurance Manual

In his presentation at the Oracle tax conference Robert Baird made a comment that people waiting for a new LAM "shouldn't hold their breath."  He went on to say that HMRC accepted the need for a new LAM but due to resource constraints it was proving difficult to find the time to produce the new material.

However, HMRC's guidance on the GAAR includes a discussion of when an established practice is evidence that an arrangement is not abusive.  C5.12.3 of the guidance reads as follows

"Taking the “established practice” first, this is not defined in the legislation, and

therefore has its ordinary meaning. Established practice may be demonstrated by

reference to published material (whether from HMRC, or text books or articles in

journals)"

Accordingly HMRC's reluctance to produce published guidance on the taxation of life assurance potentially extends the application of the GAAR.  I think we have progressed from the stage when guidance was essentially an internal HMRC process that was shared with the tax payer. As the GAAR guidance shows HMRC manuals are key in providing certainty to tax payers and ensuring consistency in the application of legislation by HMRC. If there are short term problems in updating the guidance then I would think that all that would be required would be a statement that the old LAM continues to be valid guidance except for an area where it has been superseded by the Finance Act 2012 regime.  

A link to the GAAR guidance is below
 http://www.hmrc.gov.uk/avoidance/gaar-part-abc.pdf

HMRC Proposals for Corporate Streaming

Just picking up on the other strand of the modernising the taxation of corporate and government debt condoc that has particular relevance to life insurance companies.  (see posts of the 12th and 18th June on this topic).

As set out at pages 78 - 85 of the con doc HMRC is proposing to abolish the corporate streaming rules with effect from 2015.  2015 is chosen as the date of implementation as the mainstream rate of corporation tax on profits will be equal to the rate applied to investment income in AIFs and accordingly there is no longer a requirement for this anti avoidance legislation.

The move is likely to be disadvantageous for life insurers and their policyholders.  Currently if a life insurer invests pension business funds in an AIF that suffers tax then the corporate streaming rules will give rise to a deemed amount of income tax that can be offset or recovered by the life insurance company and used to put the pension policyholder in the correct position  - i.e. a gross return.  

The life assurance industry had to convince HMRC to introduce the changes in SI 2012/2043 that preserved corporate streaming for life insurers. HMRC staff responsible for the condoc are well of these discussions, so it remains to be seen whether there will be any provisions that enable life companies to carry on streaming when other corporates do not.  I'm a bit pessimistic on this, the stated purpose of the change is for simplification so special rules for life companies may not go down well with HMRC.  Also it's noticeable that the change has been shoehorned into a consultation on loan relationships where it doesn't belong so I suspect it is a bit of a HMRC pet project.  

If corporate streaming were to be abolished I suspect it is something life insurance companies would be able to live with.  Now that foreign dividends are received tax free the issue is not relevant for many AIFs (as all their dividends are already FII) and life companies may be able to adapt their investment behaviour by, for instance, investing in PAIFs rather than standard AIFs for property holdings to ensure pension business policyholders are not subject to an inappropriate tax charge.

One final point - there are actually two alternative proposals for change to the corporate streaming rules. One as stated above is for abolition the other is to retain corporate streaming but remove the ability to offset or reclaim the income tax deemed to be deducted at source and to make the UFII element of the streamed dividend only taxable at a rate equal to mainstream corporate rate minus the rate applicable to AIFs, i.e. taxed at 0% for as long as both the mainstream rate and AIF rate are equal.

Revenue and Customs Brief 04/13

HMRC have issued guidance to life insurers on brief 04/2013 i.e. the requirement to deduct tax from certain rebates paid to policyholders.  Its a surprisingly long document and can be found here.

http://www.hmrc.gov.uk/life-assurance/rc-brief-4-13-add.pdf

Commissioners for HM Revenue & Customs v Marks and Spencer plc (2013) UKSC 30

This case caught my eye.  It relates to the Marks and Spencer group relief litigation and the time at which the "no possibilities" test for deciding that relief cannot be obtained in the country of residence is applied.  The Supreme Court agreed with the tax payer that it is when the claim is made that is the appropriate point and not as HMRC had claimed the accounting period in which the losses had arisen.

The case has no particular relevance for life insurers (unless they are considering liquidating foreign subsidiaries) but I do think the sheer length of time that it is taking to resolve the issues is worth noting.  The case first came to the commissioners in 2002 and Marks and Spencer "won" in the  ECJ in 2005.  A quick search in CCH tax cases throws up various decisions in the case in 2002, 2004, 2006, 2007, 2009, 2010 (3 separate judgements) and one other judgement in 2013.  And we haven't reached the end of the road, the whole question of "grouping issues" still needs to be decided and apparently those who know about such things believe we are off to the ECJ again.

Is there any reason to suppose that HMRC would not adopt a similar scorched earth approach in the FII GLO?  I wonder whether there is any alternative to the lengthy process that Marks and Spencer are going through.   Companies can try and reach individual agreements with HMRC but I would imagine it is hard to arrive at a fair outcome especially as the beneficiaries of FII GLO claims are often policyholders.  Would an industry wide settlement under the auspices of the FCA be an alternative to continued litigation?

Taxation of Corporate and Government Debt

I have now had a read through the consultation documentation (see post of 6th June for link to the con doc).

Perhaps the key comment comes in paragraph 3.3

" Nothing in this document is intended substantively to change the effect of the existing definitions of what constitutes a loan relationship or derivative contract, or the nature of what the regime is intended to tax"

But in addition to consultation on a number of detailed points the document includes some general proposals

These include

• Introducing purposive language into the legislation and to make it clear that this takes precedence over accounting treatment when following the accounts does not capture the economic substance of a transaction.

• Basing taxable amounts on the accounting profit and loss (i.e. ignoring amounts taken to reserves etc.)

• Combining the loan relationship and derivative contracts regime.

All of this is well worth a read but perhaps no great impact on the majority of life companies.

The specific proposals for reform of the bond fund regime and corporate streaming are probably of more importance to life insurers.  I have covered the bond fund regime in more detail below and will probably post on corporate streaming in the next week or so.

Bond Funds

In HMRC's view bond funds are a particular area of complexity within the regime for the taxation of corporate and government debt as it requires companies to identify OEICs, AUTs and offshore funds with more than 60% of their assets invested in loan relationships and treat such collectives as loan relationships. 

The proposed solution to this complexity is to repeal chapter 3 of part 6 CTA 2009.

This would see collectives with more than 60% of their assets in loan relationships taxed under the CGT rules and in a short section on life assurance the condoc confirms that bond funds held by life insurance companies will revert to being taxed under TCGA 212.  However, in HMRC's opinion there would still need to be rules to separately identify offshore bond funds to ensure that income arising in these funds is taxed.  HMRC intend  to include repeal of the bond fund provisions in  Finance Act 2014.

This may be an attractive proposal for life assurance companies, applying different regimes to capital movements in collective investments depending on whether they arise on bond or equity funds is an administrative problem.  Additionally the 7 year spread offered on deemed disposals and the availability of indexation allowance on what are effectively loan relationships has an obvious appeal.  However, I would imagine that over time the proposal would see the life assurance industry paying more tax.  

The last 10 years have seen sharp rises in the value of most bonds.  These increases whether on directly held bonds or bonds within collectives have been included in the I-E computation of life insurers as taxable loan relationships.  As most bonds will redeem at par we can, I think, be sure of a fall in capital values over time (or am I missing something here).  For directly held bonds life insurers will get the correct treatment in that these future losses will be included in the I-E computation and as the rules for loss relief on loan relationships are relatively generous they should obtain effective relief in many cases. 

However, if the condoc proposal to abolish loan relationship treatment for bonds held via collectives is adopted the fall in values will be in the CGT regime and subject to restrictive loss offset rules. Many life insurers already have net CGT losses and as set out in my post of 13th May there are additional distortions inherent in the deemed disposal regime.  I would imagine trying to reflect the proposed change in regime in unit pricing policies might throw up TCF issues, simplicity could be a very complicated business.

It will be interesting to hear what people think about this one.

 

Modernising the taxation of corporate debt and derivative contracts

HMRC have issued the promised consultation document on the loan relationship regime.  I haven't had time to read in any detail but the bond funds and corporate streaming sections will be of interest to life companies and there are a couple of paragraphs on the implications for life companies of the proposed abolition of bond fund rules (i.e. getting rid of the rule that an AIF with > 60% of its investments in loan relationships is a loan relationship).  First thought is that I don't like the proposals but I am a crotchety, old, small c conservative.  Link below.

https://www.gov.uk/government/consultations/modernising-the-taxation-of-corporate-debt-and-derivative-contracts