UK insurers angry over tax change

By Richard Scott
BBC personal finance reporter

Surplus funds are held to meet funding rules

The insurance industry has attacked the UK Government for unveiling a new tax which could cost companies hundreds of millions of pounds.

The dispute centres over how surplus funds - which insurers need to keep in reserve - are taxed.

The government says the tax change was brought in without consultation because it is targeting tax avoidance.

But the industry says the Treasury uses the tax avoidance claim when it simply does not want to consult over an issue.

Tax difference

Insurance companies hold surplus funds to meet funding rules and to protect themselves against financial risks.

Although in reserve, these funds are still invested to make money.

The Association of British Insurers says most non-pension funds are taxed on this growth at 20%, but the standard corporation tax rate would be 30%.

It is this difference that the government has in its sights. It argues that companies could treat the surplus as a tax avoidance measure, using it to pay out to policyholders.

Anger

Another area the new rules could have an impact on is demutualisations.

HM Revenue and Customs (HMRC) say the rules could apply to a mutual society which inflates its surplus before demutualisation, then uses that surplus to pay bonuses after the company floats on the stock market.

The insurance industry says it is trying to work out the impact of the new rules. But it is angry at the way the rules have been brought in without consultation.

Although the changes are only draft legislation at the moment, if they become law the tax will be retrospective to last week.

HMRC says it will listen to any representations about the draft legislation.