Opinion Former Article

ABI reaction to Emergency Budget: Competitive UK will help economy

Responding to today's Budget Kerrie Kelly, Director General of the ABI, said:

"We wholly support the commitment to make the UK the most competitive location in the G20 by the end of this Parliament. The insurance industry applauds today's focus on restoring the UK's competitiveness. We are however disappointed to see the long-awaited Controlled Foreign Companies proposals have been further delayed.

"The rolling back on public spending announced today underlines a significant shift in the boundary between the public and private sector. The insurance industry stands ready to provide private insurance-based solutions: a 5% shift towards the private sector could save the government and taxpayers £17 billion annually - more than the budgets of the Home Office, Foreign Office and DEFRA combined."

Competitiveness and business taxation
"Bringing the headline rate of corporation tax down to 24% by 2014/15 sends the right signal. Explaining how this will be paid for will be key - abolishing reliefs would have unintended consequences. In particular, restrictions on tax relief would mean companies paying tax on more than their economic profits, increasing their effective tax rates and making the UK less competitive, not more."

Taxation of foreign profits
"The insurance industry welcomes the commitment to recognise branch structures when taxing foreign profits from 2011 which will enable firms to use the UK as the hub for their European operations."

"The ABI has long called for a branch exemption, which will remove the mismatch between the current UK system and the forthcoming Solvency II regulations.*

"We will review the interim measures announced to Controlled Foreign Companies (CFCs) rules, which deal with the taxation of foreign profits made by subsidiary companies. We urge the Government to fast track changes to CFCs as they will enable the UK to compete effectively."

Annual allowance for pension tax relief
"We welcome moves to repeal the changes made by the last government, which were too complex and a disincentive to savers. We look forward to working with the Government urgently over the coming months on the way ahead to deliver a simpler allowance based system.

"Having an annual allowance would retain the important principle that people who defer income now should be encouraged and only pay tax once on money saved."

"However, the lower limit suggested in the Budget paper of £30,000 is unworkably low and would not encourage pension saving for those disillusioned with recent changes to pension relief."

"ABI research from the second quarter of 2010 showed 7.7 million working adults were still not saving for a pension, which is extremely worrying as the country faces the ticking time bomb of more people retiring and living longer."

Annuitisation
"We will work with the Government on its consultation into ending compulsory annuitisation at age 75. This is a highly complex area and there is a need for detailed work before measures can be finalised."

Capital expenditure and flooding
"We are encouraged by the Government's welcome announcement that it will protect capital expenditure with economic value. Protecting investment in flood defences is vital to protecting businesses and the economic well-being of communities. In last year's Cumbria floods 60% of insurance claims were from businesses, demonstrating the economic value of continued investment in flood defences."

Insurance Premium Tax (IPT)
"Raising IPT is a direct tax increase for the vast majority of people who sensibly protect themselves and their families with insurance. This is regrettable and could have serious unintended consequences if it puts off consumers from protecting their homes, cars, holidays and everyday living.

"For the average household a 1% increase in IPT will mean an increase of £7.99 per year from £839 to £846.99."

Capital Gains Tax increase
"This will hit savers who are higher rate taxpayers. Those investing in savings products with an expected CGT of 18% will face a very different proposition when faced with a CGT rate of 28% on exit."

Bank Levy
"A levy on assets will discourage excessive leverage based on insufficient capital, which is more sensible than a tax on bank profits. However, there is the serious question of timing, with efforts currently being made to build up bank capital levels. The Government needs to undertake careful consultation with all parties including institutional investors."

- ENDS -

Notes for Editors
*The foreign branches of UK companies would be exempt from corporation tax on the profits of the foreign branch.

How are they taxed now?
The profits of foreign branches of a UK company are taxed as part of the total profit of the UK company. Credit is given against UK tax for foreign taxes paid on branch profits. So, in practical terms, a UK company with an Irish branch will pay 12.5% Irish corporation tax on the profits made by the branch in Ireland and then an additional 15.5% UK corporation tax (28%-12.5%) on the same profits. Under a branch exemption the UK company will only pay the 12.5% Irish corporation tax on its Irish branch profits.

How is this different to a foreign subsidiary?
The profits of a foreign subsidiary, unless its profits are subject to a tax charge under the Controlled Foreign Companies regime, are not taxed in the UK. Since the introduction of the tax exemption for foreign dividends in Budget 2009, when the profits of a foreign subsidiary are remitted to the UK as a dividend they are also not taxable. A foreign subsidiary is therefore a more favourable structure than a branch from a tax perspective. A branch exemption will make the taxation of foreign branches and foreign subsidiaries broadly equivalent.

Why would a company want to operate through a branch?
It can be a less costly, easier structure to start a business in a foreign country. For financial sector companies the branch offers more efficient use of capital as there is not a need to hold separate pots of capital in different companies. From a tax perspective as a branch is not a separate legal entity any losses in the foreign business are treated as losses of the UK company which is taxed on its overall profit. Losses in a foreign subsidiary can only be set against the profits of a UK group in very limited circumstances.

Why is this important to the UK insurance industry?
Solvency II will increase the pressure on companies to manage their capital most efficiently and the most efficient structure is a branch structure. This is at odds with the UK tax system in which the most efficient structure is a subsidiarised structure. However, the tax systems of other EU locations offer branch exemptions or their equivalent, e.g. Netherland and Ireland, and so are better aligned with Solvency II. It is therefore a competitiveness issue for the UK as groups consider where best to locate the hub companies of their branch structures for their EU business and, thinking ahead to more countries seeking equivalence with Solvency II, their worldwide businesses.

1. Enquiries to:

Erfan Hussain 020 7216 7411 (Mobile: 07712 841 184)
Nicholas Burke 020 7216 7392 (Mobile: 07725 245 841)
Malcolm Tarling 020 7216 7410 (Mobile: 07776 147 667)
Kelly Ostler-Coyle 020 7216 7415 (Mobile: 07968 364 302)

2. The ABI is the voice of the insurance and investment industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK's capital. They are the risk managers of the UK's economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings and investment matters.

3. An ISDN line is available for broadcasts.

4. More news and information from the ABI is available on our web site, www.abi.org.uk.

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