Clause 55 - Overview

Part of Finance Bill – in a Public Bill Committee am 10:45 am ar 19 Mehefin 2012.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 10:45, 19 Mehefin 2012

It is a pleasure to be back in Committee, and I am looking forward to our debates under your chairmanship, Mr Bone. I refer Members to my entries in the Register of Members’ Financial Interests in relation to the Co-operative and my membership of the Kilmarnock football club supporters’ trust.

I shall speak to amendment 195 to clause 151, and amendment 196 to clause 152. As Members will be aware, friendly societies and mutual insurers have been around for hundreds of years, and the early meetings of the friendly societies were often social gatherings at which people paid their subscriptions. We can therefore say that there is nothing new in the big society and people coming together to work for the benefit of themselves and their communities. Also, those of us in what is described as the Facebook generation may note that friendly societies were a very early form of social networking, with people coming together to share common interests. People joined friendly societies in large numbers, and over time the friendly societies and mutuals began to represent specific trades and professions. By the late 1800s, I understand that there were around 27,000 registered societies.

It is important to recognise that friendly societies and mutual insurers were often the only way working people could ensure that they had help in their old age, or in times of ill health. In those days, having no income often meant a life of begging or the poorhouse, and the importance of mutual societies to their members, given the tremendous social service that they provided, and that people provided for themselves and their communities, cannot be overstated. Of course, that is why successive Governments encouraged membership of those societies. Membership did drop off, perhaps as a result of the  introduction of the welfare state, but even as recently as 1995 over half of the UK insurance industry was in mutual ownership.

I am one of those who regret the fact that a lot of time had to be spent defending the principles of mutuality and trying to ensure that people did not make a fast buck out of demutualisation—that is a debate for another day—but we have to recognise that large-scale demutualisation contributed to shrinkage of the sector. Today there are fewer than 300 friendly societies and mutual insurers, with a mutual share of around 5 per cent. of the UK insurance sector. Nevertheless, the ethos of those remaining societies remains consistent with their origins: the aim is to help people take better control of their finances within an organisation that is run for, and owned by, its members. We may not have the quantity of organisations now, but I would argue that we certainly still have the quality.

As we know, many mutual organisations are very proud of their heritage, and of providing members with the savings plans, mortgages and insurance that they need. Of course, the mutual sector nowadays is diverse. Arguably, organisations such as housing associations, various local community clubs, credit unions, employee-owned bodies and specialist organisations such as football supporters’ trusts and community mutuals are following that long heritage and tradition, and we are also seeing the development of new mutuals in the public sector—NHS foundation trusts, leisure trusts, co-operative schools and community housing—some of which have been controversial.

The important point—I shall explain later why I stress this—is that the mutual philosophy is built on a sense of ownership, and of members belonging to an organisation and trusting it to work in their best interests and for the interests of the wider community; it also allows participation in the democratic process.

As mutuals are of course owned by their members, they do not have obligations to external shareholders. They are free to focus entirely on their members’ needs and are a successful business model. As we have heard, there are mutuals within all sectors of financial services—banks, building societies, the friendly societies that these clauses refer to, insurers and health care providers. They can offer savings and investments—more recently they have been focusing on children’s savings—and mortgages, pensions and health care. It is estimated that the mutual sector in the UK accounts for over £95 billion in revenue, and affects in one way or another the life of one in three UK citizens. Around 20 million people in the UK are estimated to be members of at least one mutual, and over 900,000 people are working in the sector. Globally, mutuals’ aggregate turnover is equivalent to the world’s 10th biggest economy.

To come to the issue of the clauses and the part of the Bill that are before us, as we have heard from the Minister, friendly societies are treated for the purposes of corporation tax in the same way as life insurance companies, but with a number of modifications to reflect their special status—that is, they are not taxable on their trading result and some of their business is exempt. As we have heard, this treatment is reproduced in the new legislation by excluding them from the definition of an insurance company for the purposes of part 2 of the Finance Bill—the rules applicable to insurance  companies. Part 3 re-extends the rules applicable to insurance companies to friendly societies within specific limits and with specific modifications.

Clause 151 provides that the long-term business of a friendly society will be taxed in the same way as that of a mutual insurance company, but with a subsection providing for exemptions, which are dealt with in clauses 153 to 169. There is also a subsection allowing for secondary legislation to provide exceptions to the mutual life insurance treatment and modifications. As we have heard, those measures reproduce existing legislation, under which regulations have been drawn up, as is permitted by the clauses, taking into account the fact that the regulatory terminology for friendly societies may well be different from that for life insurance companies.

In a number of cases, there are additional categories of business to which the investment returns must be apportioned, and regulations are required so that the appropriate tax rules can be applied to friendly societies. The Minister talked about the consultation on the regulations. Those regulations have to be recast entirely, because the primary legislation to which they point is, of course, different. There are a number of important issues to consider under those rules. I am pleased to see that the new legislation preserves the principle of mutuality in the same way as the current legislation does. However, some people might argue that there is nothing in the primary legislation to prevent secondary legislation from excluding certain categories of business that HMRC perceives as being not bona fide mutuals. It could be argued that this risk is already present under the current legislation. I think I heard the Minister give a commitment to the mutual sector, but it would perhaps be helpful for him to restate an assurance that if any risk to that principle appears, he will ensure that the secondary legislation deals with that, so that the principle of mutuality is not in any way undermined. I am sure that, in his discussions with the industry, that will be taken forward.

I understand that HMRC, in the context of the present reforms, is not envisaging any general policy changes towards friendly societies, which is helpful. As the Minister said, there is an improvement in the way the proposals in the Bill are being taken forward, in particular as regards simplification. Under the new legislation, all gross roll-up business, pension business, overseas life assurance business, life reinsurance business, individual savings accounts and child trust funds are to be taxed on the basis of their real trading profits, rather than, as the Minister said, under the I minus E system. Therefore a friendly society will no longer need to prepare trading computations for those businesses, as the profits will simply be ignored for corporation tax purposes, hopefully making life simpler.

The exemptions from corporation tax on income and gains attributable to certain classes of business are all preserved, particularly for unregistered friendly societies with income not exceeding £160 a year, in clause 171. Certain categories of long-term business, with current limits and conditions for exempt life assurance businesses, are dealt with in clauses 153 to 162. Part 2 also changes the way income gains and profits are apportioned between  business categories as of 1 January 2013, and replaces the current rigid formulae with a new, more realistic commercial allocation method. That means that friendly societies, which also fall within the new rules by virtue of being treated in the same way as mutual insurance companies, will have to agree the new method with HMRC as early as possible. I understand—again, the Minister referred to this—that the industry does not feel that this will be a particular problem. Indeed, the changes are considered welcome improvements.

The transfer of business rules applicable to life assurance companies are to be applied to friendly societies. Again, this is broadly in line with the current rules and is particularly important for preserving continuity. There is a new targeted anti-avoidance rule applicable to life insurance business transfers where one of the main purposes of entering one-on-one arrangements is to secure a tax advantage. There is a clearance procedure to pre-empt its application. By virtue of clause 152, this will extend not only to transfers of engagement between friendly societies, and to transfers between insurance companies and friendly societies, but to amalgamations of friendly societies or their conversion into insurance companies. As I understand it, that is intended to be widely cast because of the tax planning opportunities represented by such projects.

Generally, we think that the primary legislation proposed would have its intended effect. Schedule 18, which makes a number of consequential amendments, carries through the new rules to the rest of the tax legislation. I understand that no questions have been raised by the industry on it. Schedule 19 provides for continuity between the current legislation and the new rules, and it looks as though that will work as intended. However, I want to mention a couple of areas where we have concerns, and which we want the Government to monitor. I heard what the Minister said about that, and why he believes our amendments are not necessary.

We tabled our amendments because there is some concern that the regulations relating to clauses 151 and 152 may have a retrospective effect. Given the potential vulnerabilities relating to mutuality and the transfer of business considerations, we simply want the Government to be required to consult with industry and to lay a review of the impact of any changes in the Library. I appreciate that there are further opportunities to modify the legislation to prevent any emerging unfairness via the regulations drawn up under clauses 151 and 152. I am sure that the Minister will give us an assurance that he will work carefully to deal with the differences in terminology relating to issues pertaining to friendly societies and to the wider mutual insurance sector. Although the general principles and most of the clauses we are considering are largely not contentious, past experience suggests that there tends be less scrutiny of the wording of secondary legislation, so there is perhaps all the more reason to consult on that and bring it forward, as the Minister has done.

The Minister referred to the fact that there is a theme running through our amendments. Hopefully the Government will appreciate that that theme is there because we believe in the importance of consultation and proper scrutiny. I will wait for the Minister’s response before deciding whether to press the amendments to a Division.