Shadow finance minister Howard Flight said provisions in the Finance Bill will require companies to recalculate their actual profits for a particular year on an annual basis for up to 10 years to reflect sums paid out on policies.
During proceedings of the Finance Bill Committee, Flight said: ‘I have learned to spot a stealth tax when I see one.’
He claimed the rule change is designed to bring in an additional £250m in revenue. But he warned: ‘The total impact on the insurance industry could be several times that figure because the measures will have major effects on income, the balance sheet and the cost of capital of insurers.’
He said the Treasury was importing Financial Reporting Standard 12 – which was not intended to apply to insurers – and ignoring massive differences between portfolios at risk of different insurers.
He said recalculating profits for 10 years or more would lead to enduring uncertainty over the taxable profits and having to recognise the possibility that future tax could damage insolvency provisions.
Former Treasury minister Stephen Dorrell said companies would react by publishing profits on the traditional prudent provisioning basis – despite paying tax on profits computed in a different way for tax purposes.
He claimed this amounted to ‘allowing the taxman to rewrite auditing standards’ and require auditors to consider the accounts in terms of accountancy principles and then consider them from the tax point of view.
And he accused ministers of pitching the International Accounting Standards Committee against the British Accounting Standards Board, the courts and insurance industry regulators.
But Economic secretary Melanie Johnson said the effects of tax changes would be gradual and give the insurance industry time to adjust.
She claimed the cost would be less than one percent of premium income – after 10 years – and that the International Accounting Standards Committee had argued that discounting future liabilities is the way to proceed.
The aim was to limit the value of tax deductions to a discounted value of liabilities.
But because this would add £1bn to the industry’s costs, companies were being allowed to opt to continue basing tax deductions on undisclosed liabilities, but pay additional tax later where the deductions turned out to be larger than the discounted value of actual liabilities.
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