The insurance industry’s pleas for a more favourable tax regime failed to influence the chancellor as he delivered his first Budget. Sarah Kennedy reports.
When Alistair Darling delivered his much anticipated Budget speech last week, the most significant development for the drink-loving insurance market was arguably the increased tax on booze.
The chancellor had not listened to calls from the ABI and other business leaders for movement on areas that could impact the profitability of the market, such as the rate of corporation tax and the issue of foreign profits taxation.
“It was a non-event,” said David Arnold, a tax partner at Ernst & Young. “But I think his [Darling’s] hands were tied and he couldn’t do much.”
Darling was constrained by the current economic jitters sweeping across the globe, as well as the Northern Rock debacle closer to home. He stood in front of the House on Wednesday, head down, and stated that corporate tax rates would come down 2% to 28% and that capital gains tax (CGT) would be pushed up from 10% to 18%, but with an entrepreneur’s allowance. Both measures had been heavily trailed.
“The new capital gains tax rate will come in next month including the entrepreneurs’ relief I announced in January,” said Darling. “And that will benefit over 80,000 businesses and investors in the next year alone – 90% will continue to pay capital gains tax at 10% – one of the lowest rates in the world.”
The relief would allow all entrepreneurs to pay only 10% tax on the first £1m they make from selling their business. Any additional profit would be taxed at 18%.
Arnold said: “It was the power of representation that caused the chancellor to impose a lifetime limit of £1m and tax the remainder at 18%. The £1m had been mentioned several weeks ago, but the big issue has been the uncertainty and people need certainty to plan their financial affairs.”
ABI director general Stephen Haddrill agreed: “The government’s lack of consultation over the effect of CGT changes has caused confusion and uncertainty for savers and the insurance industry alike.”
It was feared the changes to CGT, forewarned by the Treasury several months ago, would have a detrimental effect on small brokers and fuel acquisition activity as companies looked to sell before the changes came into effect next month.
However, analysts say the frenzy never materialised. Market conditions were not ideal for acquisitions and left those brokers looking to sell, stuck waiting for the economy to improve.
The ABI said that in the future the Treasury should deliver better analysis and consultation along with such proposed changes.
But the area that seems to be creating the most frustration and uncertainty in the market is corporation tax.
“The deduction on corporation tax was not enough,” said Arnold. “People looking to set up in Europe may now do so in Ireland. I don’t think this Budget did enough to remove this from people’s agenda.”
The Budget also failed to provide clarification on market equalisation reserves for Lloyd’s – a change the London market has been demanding for some time.
Currently it is a statutory obligation for the UK general insurance market to place a percentage of its premium, decided by the FSA based on the risk, into a reserve. The money in that reserve is tax deductible.
However, that same statutory obligation doesn’t apply to Lloyd’s, meaning, the London market isn’t granted the same tax deductions. Lloyd’s has fought for a more level-playing field in this regard, but Darling has deferred making a decision about the market equalisation reserves until the summer, leaving the issue up in the air.
When Solvency II comes into effect in 2012, the current capital requirements for the general insurance market will be revamped anyway and market equalisation reserves will no longer be a factor, leaving some to question whether the government is just biding its time.
Howard Jones, corporate tax director at Mazars, said: “It’s disappointing that there are different rules for the Lloyd’s market and it’s disappointing that the Revenue is moving very slowly on this, perhaps it thinks if it moves slowly enough it will go away.
“But I think the issue that is really holding us back is foreign profit taxation.”
This summer the Revenue is supposed to deliver draft legislation, to be implemented in 2009, so that UK companies involved in genuine trading operations in other countries won’t have to pay taxes on the dividends returned to the UK.
Jones said this would hopefully quell the desire of UK companies to redomicile to places such as Bermuda where the tax regime is more favourable.
“When that comes in, it will make the UK market much more competitive,” he said. “But we were hoping in this Budget we would see something concrete on this.”
Inside the Budget
Insurance premium tax (IPT). The government has proposed to remove the requirement for foreign insurers to appoint a tax representative in the UK. This would remove liability over IPT from the appointed agent.
Market equalisation reserves. Darling said discussions are continuing on a possible extension of a general insurance tax relief to Lloyds corporate members.
Capital gains tax (CGT). Rates will be at 18% starting 1 April. The government has provided some relief for smaller companies by allowing the first £1m of profit from the sale of a business to be taxed at 10%.
Corporation tax. Corporate taxation has dropped 2% to 28%.
Foreign profits taxation. The government says it will deliver draft legislation this summer on whether foreign-earned dividends will continue to be taxed upon returning to the UK.
