The UK government should continue to work with the insurance industry to ensure a stable, predictable and competitive tax system which takes account of increasing global competition in a world in which capital is highly mobile, a new report has concluded.
The report by the Insurance Industry Working Group, a joint government-industry policy group, urges the government to take action to prevent loss of UK business to low-tax and offshore domiciles and to counter threats to the medium to long-run competitiveness of the UK as a location for insurance business.
The Group also believes that that the consultation process surrounding tax changes needs to be enhanced, so that the impact on consumers, the industry and the wider UK economy is understood when making tax decisions.
The insurance industry is a major contributor to the UK’s tax take. In 2006-07 the insurance industry contributed GBP9.7bn in taxes including around 6% of corporate tax revenues.
“While the UK continues to offer many advantages as an attractive location for insurance companies, it is important not to be complacent about this relative advantage,” the report notes. “The evidence is that companies continually review countries’ overall competitiveness compared to other locations, including the attractiveness and relative complexity of tax and regulatory regimes, and that companies do relocate when they believe it will be to their advantage. If competitors move, or start-ups are located elsewhere, companies will always need to assess their own position. In addition, even if initially much of the underwriting activity continues to take place in the UK, redomiciling makes it more likely that the advantages of underwriting in the UK will be reviewed in future.”
“In recent years the insurance sector has seen a trend of redomiciling,” the report goes on to observe. “This began in 2002 in the personal lines market, with a number of motor insurers, such as Admiral and Zenith, relocating to Gibraltar to take advantage of the more favourable capital and tax regime. More recently, a number of high profile insurers (Beazley and Brit Insurance in 2009, Zurich in 2008, Hardy in 2007, Hiscox in 2006) have also announced their intention to move their headquarters from the UK to redomicile in what they regard as more favourable tax regimes.”
The report also pointed to the UK market’s historic struggle to compete with Bermuda for new capital after market-turning catastrophic losses, as evidenced after 9/11, and Hurricanes Katrina, Rita and Wilma in 2005 – a year in which Bermuda attracted USD8.8bn compared to approximately USD1.1bn received by Lloyd’s of London, according to the report.
Although the UK’s corporation tax rate is the lowest among G7 economies at 28%, this rate is very unattractive when set against Bermuda’s 0% corporate tax rate. Also, the report noted that much competition for insurance capital comes from elsewhere, including other European countries. What’s more, the development of new financial centres like Qatar and Dubai, as well as larger emerging centres such as Shanghai and Singapore, present opportunities for UK insurers but also further competition for new capital over the coming decade.
“This underlines the need to keep competitiveness under review in order to enhance the medium to long term strength of both the UK insurance industry and the UK economy,” the report stated. “The stability, predictability and competitiveness of tax and regulatory regimes, including the relative cost of compliance, will be an important part of this.”
The Group’s report also recommended that the government should also seek to maintain “stability and certainty and complexity” in savings and pensions taxation. “This will be beneficial to consumers, as it will simplify decision-making and enable them to plan more effectively.”
Furthermore, the Group believes that thought must be given by the government to “well-designed incentives” to help ensure people buy the savings and protection cover they need and to help encourage personal responsibility. The report goes on to recommend that the government maintain existing incentives, including tax relief on pensions, and explore new options, although it conceded that these would have to be balanced against affordability.
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