Corporation Tax Reform and Life Companies

On 12 August the Inland Revenue published the second consultation document on the reform of corporation tax (following on from the August 2002 publication).

The consultation document proposes the next steps in relation to:

enhancing the role of commercial accounts in the calculation of tax liabilities and abolition/reform of the schedular system

distinction between investment and trading companies

taxation of capital assets

The consultation documents also set out proposals for reform of the rules on transfer pricing and thin capitalisation. This article highlights the issues raised by the publication in so far as they are particularly relevant to life insurers.

General

The stated objectives of the contemplated reforms include greater coherence, transparency and flexibility. However the discussions which followed the 23 December 2002 press release "Making taxation of life insurance companies fairer" showed that the current system for taxing life companies is far from displaying these features.

Moreover, there is an allusion to possible structural reform of life taxation - the Government say at A.59 of Background Note A that the I minus E regime may change "as a result of various pressures on the system". It is assumed that the pressures referred to are the combination of accounting and regulatory change which is likely to revolutionise the way in which life companies report their financial results.

Implicit in the allusion is the assumption that the structural change would mean that the I minus E system is dismantled. The natural question arising from this assumption is why time should be spent on amending a system which has no shelf life.

The Inland Revenue pre-empt this concern by pointing out that transitional rules would probably require a survival of the I minus E system for business written prior to the date of change.

This is not an altogether convincing rationale to justify a wholesale change to the I minus E system, involving significant redrafting of complex legislation, followed by abolition of that system.

The underlying concern is more likely to be that a move to gross roll-up is yoked to the timetable of the international accounting standard on insurance contracts, which is something of a long game. If the FTSE has turned about and started upon an ascent, significant unrealised gains might arise on assets backing existing business and on new business written between now and a move to gross roll-up.

Reform of the schedular system

The Government is considering various options for reform of the schedular system. The main driver...