Corporation tax: keep it simple

As an industry that pays the third highest amount of corporation tax of any
business sector, insurers have a great interest in the level of corporate
taxation.

In 1997, the UK had the sixth most competitive corporation tax rate of OECD
countries, but we have now fallen to 20th position. The challenges this
presents, coupled with the ongoing debate about the taxation of foreign profits,
will no doubt continue to make headlines over the next few weeks.

However, just as vital as the main rate of corporation tax is for the tax
system to have a large degree of certainty. Many of the products offered by
insurance – savings, term assurance and employer liability for example – are
long term businesses, and require some consistency over the long term with
regard to the tax system. Change, be it major structural or minor tinkering
dressed up as anti-avoidance, can be disproportionately damaging.

There have been several examples of unexpected, sudden tax changes recently,
which have had a real negative impact on businesses.

The changes to CGT in last year’s pre-Budget report meant some investment
products (authorised investment funds) suddenly faced a much lower tax charge
than others (unit linked savings), adversely impacting 17 million life
investment polices in force, and the 750,000 new policies bought each year.

This was introduced without consultation and was a shock to many insurance
companies, who overnight had to reconsider their presence in this market, assess
the impact on possible profits and ultimately whether this could lead to job
losses.

This sudden change mirrors others in the tax arena, as seen with the changes
and uncertainty over SIPPS, and pension term assurance. These were both areas in

which sensible long term planning was made redundant by unexpected government
decisions.

For insurers these concerns come at a crucial time. The Solvency II
Directive, which changes regulation of insurance firms across the EU, will mean
insurers will look carefully at where they locate. The stability of tax policies
will be an important aspect of that decision. Get it right, and the UK could
attract foreign-based insurers to domicile in the UK. The government made it
clear that it is willing to work more closely with business, with the chancellor
recently meeting the ABI’s board to discuss related issues. The next few months
will be a key time to see whether the promises of consultation with industry on
crucial changes in the tax system are kept.

Sarah Knight, assistant director of taxation at the
ABI