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Financing-Arrangement-Funded Transfers to Shareholders (“FAFTS”)
FSA Return Waivers
Financial Reinsurance
Transfers of Insurance Business
Restriction of relief for expenses on reinsured business
Treatment of interest payable on amounts deposited-back from reinsurers
Companies Investing in Life Policies
Friendly Societies
Foreign Currency Assets
Disguised Interest Rules
Clarification of the scope of s432A ICTA
Purchased life annuities
Repeal of Shareholder's Excess Assets legislation
CTFB and ISAB – relaxation of administrative requirements
Securitisation SPVs – impact of amendments to CFC rules
Corrections and clarifications
UK distributions received by insurance companies
Financing-Arrangement-Funded Transfers to Shareholders (“FAFTS”)
HMRC has confirmed that legislation will be included in the Finance Bill to
deal with what it terms "Finance Arrangement Funded Transfers to
Shareholders" - FAFTS. This will replace the current legislation dealing
with contingent loans (in particular s.83ZA FA1989) with what HMRC regard as
a simpler more comprehensive and consistent set of rules for both contingent
loans and financial reinsurance. It is not intended to widen the scope or
impact of the existing rules.
Discussions at the Industry Working Party have been
ongoing for some months following the withdrawal of draft legislation
originally intended for Finance Act 2007.
The principles which are expected to be encapsulated in the Finance Bill
provisions can be summarised as follows:
Overall outline
The legislation is expected to cover “relevant financing arrangements” which
includes both contingent loans and financial reinsurance. It should apply
only to non-profit funds (current contingent loan rules apply to WP funds as
well).
Eventually, HMRC would like to see this legislation extended to cover
certain transfers into long term funds. This latter topic is still under
discussion at the Working Party and it is not expected to be covered by
Finance Bill 2008.
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Contingent Loans
The current contingent loan legislation aims overall to tax a transfer to
shareholders that only arises because of the contingent loan – recognised in
Form 40 as income but no liability being set up for repayment. It assumes
that any transfer to shareholders is first made out of the proceeds of the
contingent loan – the principle being that the loan is taxed immediately and
any repayment is deductible in future periods.
The revised approach applies to non-profit funds only and instead assumes
that transfers are first made out of normal “Non-FAFTS” surplus. Contingent
loans are taxed only if transfers are made in excess of the Non-FAFTS
surplus.
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Financial Reinsurance
The new FAFTS regime covers financial reinsurance and amalgamates the “relevant
outstanding reinsurance amount” with the contingent loan “relevant
outstanding debt amount” when working out what is untaxed in the relevant or
earlier periods of account.
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Transitional rules
Transitional rules attempt to ensure that amounts taxed under the current FA
1989 s83ZA are not taxed again.
Our view
In many respects, the revised approach does seem more technically robust
and may be simpler for companies that make occasional use of this type
of financing.
Discussions are still in progress to ensure the Finance Bill version of
the legislation reflects industry comment, is appropriately targeted and
as simple as possible to administer. |
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FSA Return Waivers
HMRC announced that it intends to review the use of waivers obtained by life
companies under section 148 FSMA. Its concern is the extent to which waivers
affect taxable FSA surplus. HMRC has indicated they will use the statutory
provision of s.431A ICTA 1988 to introduce secondary legislation countering
any perceived avoidance in respect of waivers obtained, possibly by
disregarding the tax effect of the waiver. 2007 FSA returns currently being
finalised will not be impacted by the proposal.
Our view
It will be vital that HMRC consult fully with Industry to ensure their
specific concerns are addressed whilst recognising that waivers are
generally obtained due to regulatory or commercial needs and therefore
should be tax effected. |
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Structural Assets
Following discussions with the Industry Working Party, HMRC has agreed that
the regulation making powers in respect of capital gains on structural
assets are no longer necessary. In addition HMRC will clarify that
structural assets are not included in the free assets amount for s432A ICTA.
Further discussion will take place on whether the definition of structural
assets should be extended.
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Transfers of Insurance Business
SI 2008/381 (made 18th February 2008) introduced substantial amendments to
the Transfers of Business legislation in Finance Act 2007 Schedule 9. The
draft legislation circulated today makes a number of further changes arising
from discussions between the ABI working party and HMRC. A flaw is corrected
in the commencement provisions of SI 2008/381 applying where losses are
transferred between I minus E and Case I companies; there is an amendment to
the timing of the incidence of a charge under s.444AB (relevant
non-transferred assets and retained assets) where a transfer occurs on the
day following the end of a periodical return period; and the definition of
liabilities in certain transfer situations is amended to ensure that, for
example, deposit backs are appropriately dealt with.
As anticipated, measures are also to be introduced in Finance Bill 2008 to
facilitate the transfer of tax exempt other business (TEOB) from pre – 1973
Friendly Societies to post 1973 – Societies.
Our view
These draft amendments were expected and make some necessary
clarifications to the Transfers of Business legislation as it currently
stands. Other (probably more significant) issues remain under discussion
with HMRC, particularly around the operation of s.444ABD where losses
arise in the transferor, and the implementation of the repeal of s.83(3)
FA1989.
The extension of the scope for Friendly Societies to transfer exempt
business is a welcome outcome from the Friendly Societies working party. |
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Restriction of relief for expenses on reinsured business
Draft legislation was issued at PBR limiting tax relief for BLAGAB expenses
on reinsured business in certain circumstances which HMRC considered
abusive. Following intensive lobbying by the industry, HMRC circulated
revised draft legislation in early January which was significantly more
restricted in scope. The draft legislation now targets so-called “fronting”
arrangements, the most common of which are situations where a significant
proportion of the insured business is reinsured “back-to-back” with a
reinsurance subsidiary of the introducer. Today’s HMRC letter to the
industry also indicates lots of changes will be made to S.85 FA1989 to align
it with this treatment.
The measures would broadly limit the relief given under s.76 ICTA 88 for
expenses on the reinsured business in excess of any taxable reinsurance
commissions received on the same business. We understand it is still
expected that the measures would affect policies and contracts made on or
after 9 October 2007, although latest draft legislation indicates that there
is an element of retrospection in respect of the policy inception date.
Our view
Together with the industry, we will continue to argue that the
retrospective elements of the measures (which in effect require the
company to re-write the history of earlier years’ spread acquisition
expenses) should be abandoned. However the small number of companies
which front business may need to take a view of the value of their E
should this lobbying be unsuccessful. |
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Treatment of interest payable on amounts deposited-back from reinsurers
Draft legislation has been circulated in relation to the tax treatment of
loan relationships (primarily interest payable) arising on reinsurance
deposit-back arrangements, whereby reinsurers deposit a proportion of the
premium under a contract of reinsurance back with the insurer. Currently
this will be apportioned between tax categories of business in line with the
income allocation fractions.
This can result in tax asymmetries. Under the draft legislation, for periods
of account beginning after 1 January 2008 (other than those ending before 12
March 2008), loan relationships arising on such arrangements will be
directly referable to the category of business subject to the deposit-back.
Our view
Whilst we understand HMRC’s rationale for proposing this change, it is
perhaps unfortunate that the issue could not have been addressed by the
Apportionments working party, as part of a balanced review of the
deficiencies of the current regime. |
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Companies Investing in Life Policies
As announced in the PBR 2007, companies which invest in life policies which have
a surrender value will be treated as holding a loan relationship asset and the
fair value movement will be taxed annually with a notional tax credit of 20%.
This will apply for accounting periods which commence after 1 April 2008. HMRC has taken into account representations made to them that this could
inadvertently catch policies which are not investment policies. The
amendments will ensure that death benefits are not taxed and introduce
further transitional measures.
Our view
The changes which HMRC has proposed are as a result of representations
and subject to reviewing the legislation should produce a reasonable
result. |
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Friendly Societies
Finance Act 2007 amended section 466(1). This was not intended to change
the substance of the definitions but it resulted in some PHI policies no
longer being exempt business.
Finance Bill 2008 will restore the pre-2007 position with retrospective
effect. In the interim, HMRC will apply the legislation as though the
pre-2007 definition had not changed.
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Foreign Currency Assets
The concept of “foreign currency assets” (FCAs) was introduced by FA 2007 to
describe assets backing overseas business, the income and gains from which
are directly referable to gross roll-up business. To qualify as FCAs, there
is a requirement that relevant assets must be certified as FCAs within 3
months of the company’s year end. Typically for 31 December companies the
first election has to be made by 31 March 2008.
In addition the definition was also proving to be difficult to implement in
practice and for example sterling assets held to back services business
could not fall within the definition of FCAs. HMRC has recognised these
difficulties. As a result legislation will be included in Finance Bill 2008
to amend the definition of FCAs, as follows
The assets will now be called “foreign business assets” (FBAs).
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There will be no certification requirement so if
assets fall in the definition the assets will be FBAs
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Companies will also be allowed to elect irrevocably
that none of their assets is to be treated as a foreign business asset:
such assets will then be apportioned using the formulae in section 432A
etc. ICTA, 1988.
In addition the 3 month time limit certification
requirement for 2007 will be changed to 12 months and all companies
will be allowed, but not required, to elect to use the new rules for
their 2007 tax return.
Our view
These changes are to be welcomed and deal with the concerns which
companies had regarding the operation of the original rules. It also
means that companies do not have decide to make the election by 31 March
2008 |
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Disguised Interest Rules
Legislation will be introduced to tackle financial products avoidance, with
a view to introducing the legislation in Finance Bill 2009.
In addition legislation will be introduced in Finance Bill 2008 to block
certain schemes.
Legislation will also be introduced to stop schemes that are intended to
avoid or exploit the 2005 “shares as debt” rules in sections 91A and 91B of
FA 1996.
Our view
A possible concern for insurance companies is that assets such as
preference shares could be caught by this legislation. It will be
helpful to have confirmation from HMRC that this is not the target. |
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Clarification of the scope of s432A ICTA
HMRC has stated that as part of the ongoing work on simplifying life
assurance corporation tax provisions FA 2008 will make it clear that:
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for I-E business, S432A applies apart from when the legislation is
required to allocate investment return for the purposes of GRB business
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Losses on disposal of assets only relates to capital
gains tax act losses
The legislation will also list all types of income which are taxable
under the I-E computation.
Our view
This has not been discussed with the industry and it will
be important to review the legislation to make sure that it does not
have any unintended consequences. |
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Purchased life annuities
Regulations
were laid before parliament on 5th March 2008 and come into force on 6th
April 2008. The regulations revise the process for administering the
calculation and notification of the exempt capital amount and use more up
to date mortality tables than the 1956 regulations.
Our view
Companies should ensure that there are systems in place to apply these
new regulations so that the income/capital allocation on PLA is correct. |
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Repeal of Shareholders’ Excess Assets legislation
The repeal of the shareholders’ excess assets legislation in s.432A ICTA
1988 (which was announced in last year’s PBR) is to be brought forward to
apply to periods of account beginning on or after 1 January 2007.
Our view
HMRC has noted that it intends to revisit the issue which gave rise to
this legislation as part of the Apportionments working party. It is to
be hoped that that this will produce a more satisfactory regime. |
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CTFB and ISAB – relaxation of administrative requirements
There is to be some mitigation of the administrative requirements in
relation to these categories of business. Child Trust Fund providers will no
longer be required to collect CTF vouchers from parents. ISA managers will
need to produce annual, rather than quarterly statistical returns, and
documentation retention requirements will be eased.
Our view
Any relaxation of the administrative burden around these low-cost
products is broadly to be welcomed, although any systems changes can
themselves have cost implications. |
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Securitisation SPVs – impact of amendments to CFC rules
Representations have been made to HMRC that overseas Special Purpose
Vehicles (SPVs – frequently used in securitisation arrangements), which are
often owned by overseas trusts but controlled from the UK, might be caught
by the proposed amendments to the Controlled Foreign Company rules. HMRC has
committed that, where they would currently be exempt under the motive test,
they will continue to qualify for such treatment.
Our view
It is extremely important that the tax position of such entities should
be made completely clear as soon as possible, since any risk of unfunded
tax liabilities is commercially unacceptable in arrangements of this
sort. |
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Corrections and clarifications
A number of further amending provisions are announced, most notably:
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Retrospective correction of a cross-referencing
error in the operative rule in Schedule 26 FA 2002 for treating BLAGAB
derivative contracts credits and debits as non-trading credits and
debits, following the replacement of paragraph 1(2) to Schedule 11 FA 1996 with FA 1996
s.103(3)(c);
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Removal of circularity from the calculation of
s.85A FA 1989 Excess Adjusted Case I Profits (which arises because the
Case VI amount in respect of the EACIP appears itself to be a component
of relevant income per s.85A(6));
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Tightening up the drafting of s.436A ICTA 1988 to
clarify that only GRB losses may be offset against GRB profits.
Our view
It must be likely that other (substantial or less significant)
corrections will be required in future months given the enormous volume
of recent new and amended legislation. |
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UK distributions received by insurance companies
As part of the anti-avoidance simplification review, the legislation to
prevent "dividend buying", sections 731 to 735 and section 736 ICTA, is to
be repealed. As these rules have no practical application to companies other
than to insurance companies writing non-life business, Finance Bill 2008
will therefore include legislation (section 95ZA ICTA) to preserve the
effects of sections 732 and 736 in relation to insurance companies. However
as a simplification measure, a company will only have to consider these
provisions if it receives relevant distributions exceeding £50,000 in any
one accounting period.
Our view
HMRC has repealed what is mainly redundant legislation but will
introduce new legislation to maintain the status quo for insurance
companies writing non-life business to avoid any potential abuse. |
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