Colin McHardy (Chair) HMRC
Robert Baird HMRC
Mike Chadwick Friends Provident
Peter Barrow PWC
Nigel Collard Legal and General
Stuart Secker Aviva
Matthew Taylor E&Y
Andrew Todd Deloitte
Philip Lewis KPMG
Kate Webster ABI
Chris Brabyn ABI
Neil MacDonald (HMRC)
1.1 The minutes of the last meeting held on 12 July 2006 were agreed. HMRC reported that there had been some e-mail exchanges since but overall little progress had been made, as both the ABI and HMRC had prioritised their resources towards other strands of the consultation process.
2.1 It was noted that consideration of the removal of s83(3) and ss83AA/AB had been taken on by the transfers of business workstream and that the draft legislation proposed the repeal of these sections for transfers on or after 1 November 2007. The ABI pointed out that there were issues with the drafting of s83AA and s83AB which would need attention if they were retained for transfers before 1 November 2007. HMRC said that they had already received and considered representations on this point, and it was now intended to repeal s83AA/AB with effect from 1 November 2007 for transfers both before and after that date. This means that neither section 83(3) nor section 83AA(6) will have any effect for a company's period of account that ends on or after 1 11 2007 irrespective of when any transfer of business took place.
3.1 The industry had requested that the standard SSE holding threshold of 10% should be applied for structural shareholdings of the long term funds of life companies. HMRC and ABI recognised that the legislation was designed to exclude portfolio investments from the exemption. The ABI suggested that a 30% threshold for quoted investments, which would cover portfolio holdings, and a 10% threshold for other investments might be appropriate. HMRC would consider this but first would like to know the extent and nature of holdings in long term funds between 10-30% which the industry considered “structural”. They had already been advised that the type of holdings excluded at the moment included (post-depolarisation) investments in IFAs, in particular multi-ties, and possibly some private equity investments. The ABI would ask members to supply this information. HMRC said that expectations should not be raised and it was unlikely that the issue could be fully resolved in FB07.
3.2 The key issues in respect of SSE and the Case I/VI treatment (below) were agreed to be the definition of “structural assets”, and the appropriate transitional arrangements. “Structural assets” could be wider than simply shares, and could include appropriate properties and structural loans. HMRC would consider this further.
3.3 HMRC was also sympathetic to excluding UK dividends from structural assets from Case I/Case VI altogether. For consistency, value movements and expenses in respect of such holdings should also be omitted from Case I/ Case VI. . HMRC indicated that the changes to primary legislation to effect this could be straightforward, and could potentially be introduced in Finance Bill 2007 if Ministers agreed. The detailed definition of structural assets could be set out in regulations, which would be developed in consultation with the ABI.
3.4 HMRC indicated that structural assets should probably be CGT assets entirely, possibly within section 440(4)(f) or with a separate s.440(4) ICTA box.
3.5 The ABI requested that a transfer between a long term fund to shareholder fund should be within SSE and therefore could be treated as a deemed disposal under section 440, but with no CGT charge in the year of disposal. A relaxation of the rule at para 6 Sch 7AC TCGA 1992 would be effective in terms of transition. There were a number of associated issues that would arise, the ABI was particularly concerned to avoid double taxation. HMRC agreed to consider.
4.1 HMRC had requested clarification of why the ABI considered that s213 loss carry-backs did not operate effectively where the transferee to a transfer of business already conducted long-term business. The ABI pointed out that s213(8A)(a) was clear and quite specific. Before deciding on whether remedial action was appropriate HMRC wished to know the extent to which companies were adversely affected by this rule and also by the connected party rule at s18(3) (see 6 below). The ABI would ask members for this information.
5.1 The ABI had pointed out that companies could find themselves potentially subject to double or triple taxation within these rules and it was clear that the legislation was not joined up (the problem was essentially that the 3 sets of distinct rules operated independently without giving priority to one charging provision). HMRC wanted to resolve this but wished to see specific examples from the ABI before considering further. ABI recognised that they were not aware of companies in fact suffering double taxation, but that this was actually due to inspectors applying common sense and discretion. The potential double/triple charge remained an issue for CTSA, and needed to be addressed. The ABI preference was that s212 should override, given that this gave rise to a deemed disposal at market value. Where the relevant asset was a section 212 asset, that asset should be excluded from the offshore funds legislation in section 758 and excluded from the CFC regime as being deemed to satisfy the “motive” test in section 748. HMRC requested a technical note from the ABI giving specific examples on how the three regimes could potentially conflict, that they could put to Parliamentary Counsel and also to colleagues responsible for the CFC & Offshore Funds regimes, which the ABI agreed to provide. Because of interaction with other (non-insurance) legislation, this was likely to be a FB08 measure.
6.1 HMRC accept the points made in the ABI response to the May 06 Consultation (question 25, re losses on OEIC/unit trust holdings sold to a manager in the life company’s tax group) and intended to amend the rules in FB07 for prospective losses. ABI requested that existing connected party losses on such disposals should be made capable of being offset against deemed disposal gains going forward, without restriction. ABI also noted it believed it was fundamentally wrong for s18(3) TCGA to apply to any statutory market value disposal. HMRC was more cautious about these requests, and asked ABI for more information on the quantum of the existing trapped connected party losses at issue.
7.1 The work on this was parked. The transfers of business workstream was picking up the key issue of the treatment of consideration on a transfer of business.
8.1 The list was reviewed
.
8.2 Item 2-s434A route had not been taken.
8.3 Item 23-s434A(2)(a)(ii) was redundant.
8.4 Items 11-15-pension loss streaming-the ABI again urged that pension losses should not be streamed. This was being looked at by the amalgamations workstream. This was a priority. Other losses measures were lesser but still priorities for the industry.
9. Keeling schedule
9.1 The ABI noted that the Keeling Schedule appeared to be in error as regards section 444A(3ZA). The Keeling Schedule omitted the words “except that nothing …”. There was no amendment to this effect in the draft legislation and HMRC agreed that this appeared to be a “cut and paste” error.
10.1 HMRC wished to know if any company might be affected if Extra Statutory Concession C27 (excess needs relief pre-1994 cases) was deleted. The ABI agreed to consult with members about this.
10.2 The ABI pointed out that Sch 11 Para 5 FA 96 (accruals basis election) was still being reproduced in legislation, although now redundant.
11.1 The group had picked this up following PBR announcement. It was not realistic for HMRC to deal with their concerns by FB07. HMRC was looking at non profit business only, and the sorts of areas in which there were concerns involved mainly what HMRC believed to be deliberate manipulation of counterparty risks to obtain Case I deductions. HMRC also thought that changing the accounting for lapses from netting off against liabilities to accounting as an asset too contingent to be valued could be inappropriate for tax purposes.. The views of the ABI were sought. The ABI said that they were against overriding the FSA return valuation rules for tax purposes. But the HMRC view was that those rules may not always be appropriate for tax, and that in some cases companies were not seeking FSA waivers which would have been available. The ABI noted that, if surplus was adjusted for tax, it was in practice very difficult to ensure that the unwind of any such adjustment was treated appropriately. It also noted that removal of the Crown Option, and any possible changes in respect of structural assets should deal with many of HMRC’s concerns.
11.2 One of the examples cited in the PBR note involved what HMRC believed
was deliberate manipulation of the rules for accounting for recovery of commissions.
However, ABI noted that it was aware of at least one instance where a change
of accounting for recovery of commissions was forced on the company by the
FSA, and any tax advantage obtained was not deliberate.
‘
11.3 The ABI thought that HMRC’s concerns were directed at a very small
number of companies. For example, any manipulation of the valuation rules
that might occur would probably affect only structural assets (other assets
are required for solvency), and changes to the regime for structural assets
might mitigate this risk substantially. HMRC agreed with this. HMRC was urged
to target their measures carefully. ABI suggested that a sole or main purpose
test for valuation movements might provide HMRC with the comfort they are
seeking.
12.1 HMRC said that, with the repeal of s83(3), they had been considering whether they had enough protection in relation to additions to the long term insurance fund. HMRC said they had seen instances where cash had been injected into the fund in non-taxable form simply to create surplus, e.g. to repay a contingent loan, and allow a transfer to shareholders. Reference was made to LAM 6.57 and HMRC confirmed that there was no change in principle but they sought a more codified way forward to provide certainty and consistency of application. They were considering legislating between "good" and "bad" additions to the long-term fund, in a similar way to that done for contingent loans. The ABI asked HMRC to provide a paper setting out both their concerns and their thinking on this issue.
13.1 This was now likely to be held after the Budget
14.1 Early April if possible. E mail exchanges on issues especially those that were likely to be featured in FB07.
