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Treasury considers options for reserve tax


LONDON—HM Treasury has announced further details of its planned reform of the tax treatment for property casualty insurers' reserves in the United Kingdom and published an impact assessment.

As part of the annual budget presentation of the U.K.'s Chancellor of the Exchequer, Gordon Brown, the government said that it aims to reduce the cost to industry of complying with the current tax rules and to eliminate the tax lost to the Exchequer.In its "Budget 2007: Regulatory Impacts Assessment," HM Treasury said that the current rules are complex, lengthy and require continual maintenance. "The operation of them therefore is at considerable cost to general insurers, especially at Lloyd's where the calculations are particularly difficult," it stated.

HM Treasury is keen to stem lost tax revenue through what it called insurers' use of a "disclaimer election," existing rules which allow companies to disclaim a small amount of reserves and reduce their tax burden. "This disclaimer election has also been used to accelerate the use of tax losses in groups of companies, which causes a significant loss of tax," HM Treasury said. The government estimates that some £640 million ($1.25 billion) in tax revenue is lost through the accelerated use of tax losses.

The Treasury began informal consultation with the insurance industry in January over the taxation of reserves. "The industry response was clear and consistent: the disclaimer election was essential to maintaining the fairness of the rules, but there was anyway a case for a more wide ranging review," HM Treasury said in its impact assessment.

In the impact assessment, HM Treasury said that there was no enthusiasm for a new regime. It recommended the repeal of the current rules, a transitional rule that allowed a disclaimer election and the introduction of a revenue protection measure. The industry was said to prefer the option to repeal the current rules without replacement.