Budget 2009: ABI reaction

The ABI has given its reaction to the 2009 Budget on foreign profit taxation, savings, trade credit and gilts.

Stephen Haddrill, the ABI’s director general said: “The Budget is a mixed bag for the UK insurance industry. We recognise the Government faces exceptional challenges and has few easy answers. We are pleased the Government has accepted our arguments on foreign profits and the need to raise ISA limits substantially. But this is a disappointing day for pension saving.

"The decision to curtail tax relief, while only affecting a minority of pension savers, sends an alarming message that pension promises can be easily broken. To maintain consumer confidence in the pensions system, the Government must give a categorical assurance that the historic principle of pension savers receiving tax relief on their contributions will not be undermined any further. “

• Foreign profit taxation

In the pre-budget report 2008 the Chancellor announced that foreign dividends received by large and medium groups would be exempt from UK tax.

He also announced plans for a worldwide debt cap on interest so that tax deductions for interest claimed by UK members of a multi-national group would be restricted.

Peter Vipond, the ABI’s director of taxation said: “The dividend exemption on foreign profits should help rebuild the UK’s battered reputation as a modern base for global financial service firms. It is good news that it will be adopted in July this year and we now need an early completion of the review of controlled foreign companies rules.”

“The exclusion from restrictions on relief for interest, (the ‘debt cap’) for financial service firms is the right move. It recognises the unique nature of the sector.”

The taxation of foreign profits a key area for insurers; the UK insurance industry pays the third highest amount of corporation tax of any sector, at £2.9 billion and two insurance firms have recently announced plans to leave the UK over worries over the tax competitiveness of the UK. (Brit Insurance to Netherlands and Beazley to Ireland).

• Savings - ISAs

Vipond said: “We have called for the ISA limit to be raised to this level and are pleased as this will help people save in a flexible product that addresses their lifetime needs. The ISA’s flexibility, in allowing both cash and equity investment, will be welcome by savers and should play a part in moving the UK to an economy led by investment.”

• Trade credit

Nick Starling, the ABI’s director of general Insurance and Health, said: “In ensuring that fundamentally healthy companies will get extra support, the Government has not tried to second-guess the judgement of insurers. By basing its proposals on the risk assessments carried out by insurers, the Government has endorsed the need for the market to judge and price risk. The ABI and trade credit insurers have worked closely with the Government to make this scheme possible, and our constructive dialogue on how insurers can help to provide that support will continue.”

• Gilts

Vipond said:: "New debt issuance of around £200bn this year, and with the prospect of very significant further issuance in the years to come, raises basic questions about the functioning of the UK economy. Insurance companies are likely to be major purchases of this debt, and will need to see more flexibility in the maturity profile offered, as well as in the introduction of book building approaches to raising the debt - not just the current auctions.”

• Economic overview

Dr Rebecca Driver, director of research and chief economist said: "It is clear that the economy needs to rebalance if it is to return to sustainable growth. This Budget will be judged on whether it can deliver this, without putting at risk any of the fundamentals for recovery. On balance, the measures around personal debt and savings in particular, suggest that the Chancellor has failed to put in place the right incentives to underpin this long-term shift.”