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.