The tax treatment and clearance process for Part VII transfers in the existing regime is well known, albeit complex, but the new regime raises a number of uncertainties which are likely to exist until companies have tested the new legislation and HMRC’s attitude to the TAAR in particular. Combined with the likely increase in sector consolidation driven by Solvency II, this could give rise to an increased risk for companies.
Some of the key issues are discussed below.
- Policyholder tax attributes may now be caught by the TAAR, which is a significant difference from the existing legislation - which only looks at shareholder profit. It means that friendly societies and mutuals may find they now need to apply for TAAR clearance.
- In terms of ascertaining whether there is a tax advantage, there is no time constraint to be applied when looking forwards into the new regime for arrangements entered into with a connection to the scheme.
- Schemes that might previously have been cleared under the TAAR, may now be challenged. Care will need to be taken that all documents prepared in connection with the scheme fairly reflect the main purposes of the scheme, so that if there is a tax benefit, its importance compared with other benefits can be clearly demonstrated.
- The intention is that, for intra-group transfers, the impact of the transfer itself should be neutral from a tax perspective. Whether the Finance Bill achieves this is unclear and may depend on how the legislation is ultimately interpreted.
- Non-BLAGAB losses transferred will, in future, be streamed as they will follow the normal trade loss rules. This will require tracking of profits as they emerge in the transferee.
- Any profits on the transfer of PVIF will be taxed immediately in the transferor and, although the amortisation should be deductible in the transferee, this creates a significant timing mismatch.
- How the Part VII transfer is accounted for in the statutory accounts will now drive the tax issues that will arise. This is a complex area and tax departments will need to work closely with their finance colleagues in order to understand the different possible accounting options and the related tax implications.
- The project team should engage with tax early in the process.
- The main purposes of the scheme should be clearly and fairly documented.
- Discuss the likely impact of the TAAR with HMRC at an early stage so that risks can be identified and monitored.
- And finally, don’t forget all the other aspects that need to be dealt with – VAT, stamp duties, overseas aspects and policyholder and pension compliance.
Overall, the expectation is that the new regime should simplify the tax treatment of transfers of business – the removal of the investment reserve and inadmissible assets should contribute to this. However, we view the widening of the scope of the TAAR as introducing further challenges in managing the clearance process in the context of the project and court timetables and this will need careful planning.