From a political perspective, the attitude has been that as long as you pay tax on your UK profits, the government wouldn’t take an interest in what you earn in terms of non-UK profits. As a statement of principle, it sounds reasonable, but there are consequences to this approach. In particular, it exempts dividend income from overseas subsidiaries. It also exempts non-UK profits from UK companies, meaning that avoidance of non-UK taxes remains untackled.
There’s a general understanding that the UK should only be taxing profits on UK risks. That’s fine, but there’s no clarity on how we define a UK risk. Many in the UK would like this definition to include the location of that risk, but HMRC wants to include activities reinsured in the UK regardless of their location. This is sensible, not least because it would bring the law in line with other industries, but it would also mean that the insurance of non-UK risks can be done anywhere.
The danger for the UK here is that US and Middle Eastern risks could be insured from anywhere. This would mean the UK not only missing out on tax revenue, but also losing the wider economic contribution from that activity. All in all, this smacks of a ‘beggar-my-neighbour’ tax system that seeks benefits for one country at the expense of others.
Everyone in business agrees that trying to give the UK a competitive edge and make it an attractive place in which to do business is a good thing. Does the current tax regime put people off? I think historically it has. Groups trying to set up pan-European insurance operations have tended to favour Ireland over the UK, and that is largely down to tax. Not only is Irish corporation tax low at 12.5 percent, but the country also has favourable tax rules for non-doms at a time when there has been a clampdown in the UK.
The relative unattractiveness of the UK’s tax regime compared to other countries has also led to a situation where a reasonable part of the Lloyds market is located outside the country.
The government is definitely moving in the right direction in terms of heightening the appeal of the UK tax environment. There are, of course, other factors that may lure prospective insurers to the UK. The Lloyds of London market is clearly a big draw. Meanwhile, the UK retail market for life insurance is huge and not easily tackled from outside the UK.
Ultimately, if companies are thinking of setting up a centre of expertise, tax is undoubtedly a factor they will have to consider (alongside other key issues such as the availability of expertise). But talk is cheap and the difficulty lies in execution. Some of the tax exemptions are not as available in practice as the intent suggests. Take the controlled foreign company rules, for example, which don’t work nearly as well for insurance groups as they do for other groups.
Reducing corporation tax and increasing tax exemptions must be applauded, but there remains a huge amount of work to be done in turning those political statements of intent into real-life policy and practice.