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In conversation: Tax and the insurance sector

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Challenges facing the sector

The UK insurance industry contributes £10.4bn in taxes to the exchequer and is a significant source of export earnings (see Association of British Insurers: UK Insurance Key Facts 2012). Mark Edwards, head of tax of Lloyd’s of London, says: ‘Over 80% of the Lloyd’s Market’s business comes from outside the UK, and we’re providing high quality, well paid jobs here. We are the type of business that government wants to encourage.’ Many London market insurers left the UK and it remains to be seen if they will all come back. The government’s aim in rewriting the CFC rules was to attract returners and discourage further migration. Edwards thinks the biggest challenge for the sector is making those changes work. ‘There’s still work to be done with HMRC to ensure their success,’ he says.

The international nature of their business means that Edwards’ peers are looking hard at transfer pricing and PEs. HMRC has raised transfer pricing enquiries on several insurers, and more may follow as there is a dedicated team on the case. ‘It’s important to me to understand other territories’ PE rules too, and how they interpret OECD guidelines on transfer pricing,’ says Janis Webster of Brit.

Rob Clayton of RSA comments, ‘Capital is stretched across the industry and regulatory activity is increasing. That’s pushing many organisations towards using overseas branches rather than traditional subsidiary structures. Operating overseas through branches brings new transfer pricing risks at a time of ever changing legislation in our 30 odd territories, and increased aggression from many tax authorities outside the UK.’

Edwards agrees. ‘Tax authorities are under pressure to raise revenues and part of this is a new focus on transparency and ramping up reporting requirements like FATCA and SAO. However, there’s a risk that the administration burdens end up being disproportionate for compliant taxpayers like ourselves; we’re having to engage constantly with tax authorities to mitigate that.’

The current debate on transparency means boards are looking to their tax directors for reassurance that they won’t be on the front page of the tabloids. Simon Burke of Legal & General thinks they were ahead of the curve. ‘What activists and the media really want to know is how much UK tax the entity has paid. We tell them,’ he says. L&G currently holds PwC’s Building Public Trust Award for Best Tax Reporting in the FTSE 100. Burke thinks the government should do more to make life insurance and fund management comparable with other businesses. Different tax rules for the sector should be scrapped. ‘Our special rules have made us insular and given us a smaller voice,’ he suggests.

RSA’s Clayton points out that the sector’s two prime concerns are how it manages its capital and how it is regulated. Tax has to be managed within that framework, and it is currently changing. The FSA, which regulates insurers, is splitting into two bodies – the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) – this year. The EU’s Solvency II rules are bringing changes to capital calculations. Janis Webster says, ‘Solvency II results in equalisation reserves being scrapped, and that impacts on our tax position as a relief previously available will be withdrawn.’

Issues for tax directors

It’s hardly surprising that insurance tax directors feel they face challenges. ‘My biggest challenge is integrating tax efficiency into everything we do,’ says Simon Burke. ‘That means having efficient processes, and it means that commercially, we look to minimise tax by choosing the slightly lower tax option if there are two legitimate alternative courses of action. We’re all working together on this at L&G. My team doesn’t sit in head office waiting for the phone to ring; accountability for tax is decentralised to our divisions and subsidiaries. I take the 100 interventions approach: if we can find 100 small tax-efficiencies in a year, we’ll have a tax-efficient organisation. We don’t need schemes that are vulnerable to a GAAR.’

‘Tax doesn’t happen by itself,’ adds Brit’s Janis Webster. ‘I network within the business as widely as I can, as tax is a consequence of business actions, and thus we need to be involved in transactions at an early stage.’

Jennie Rimmer of Aspen says that getting visibility within the business for the value added by the tax function, helps to support the business case to get the headcount and budget she needs. Indirect taxes and employment taxes are becoming more complex and require increased focus to ensure processes and systems are adequate to support compliance requirements internationally. ‘We have to get these right so they don’t cost us money later.’

Jennie Rimmer works hard to keep the tax function’s profile high. ‘I send a quick email to the FD and CEO when there’s a new development, and I also make them aware of wins. If we’ve saved some tax or proactively improved a process, it’s good for the Board to know and it motivates my team when they know the FD appreciates them for it.’ She also invests time in building an internal network of sponsors within her peer group and the executive team, and in addition meets regularly with the NEDs to ensure they’re kept abreast of relevant changes to tax legislation, and to answer questions and concerns. This can also provide a forum for wider personal development discussions outside of the direct reporting lines internally.

Networking with other group tax directors in insurance and the wider world, through committee membership within the ABI and CIOT, is very valuable to Jennie too. ‘I find it helpful to share ideas and concerns with fellow tax professionals both inside and outside of the insurance space,’ she says. Breakfast seminars offered by advisers are a useful way of keeping up to date with technical changes. ‘They provide a short, punchy overview, don’t take too much time out of the day and give me a chance to network.’

There is broad agreement about the need to let CFOs have a clear line of sight of the tax team’s successes, and keep them up to date. ‘If there’s an article about tax in the FT, I’ll email my comments to senior management within an hour,’ Rob Clayton says.

Technical skills

There is a debate about whether an insurance tax director needs a tax background. Janis Webster thinks it’s a requirement, but not the only one. ‘You need good enough technical skills to know what to look out for, and to know what you don’t know. Communications skills are crucial, because you’re dealing with non-specialists. You have to think commercially so you can contribute to the business. And you must develop and motivate your team, so everyone takes something positive away from what they’re doing.’

‘It helps, but I don’t think it’s the essential skill,’ says Mark Edwards. ‘The key skills in my opinion are getting the best out of a team, the ability to prioritise and being good at risk management. They’re just as important if not more so.’ Simon Burke says, ‘What’s most important is pulling your weight in the group’s leadership team, representing the tax perspective in setting the wider strategic objectives of the group. We pay a huge amount of tax. Our total tax contribution usually exceeds the return to shareholders.’

All agree that tax teams must stay close to the business, and like L&G’s Burke, strive for efficient processes. ‘Tax teams have to automate where possible,’ says Janis Webster. Rob Clayton wants his team to be multi-taskers: ‘Internal tax advisers need to be more flexible, covering international tax, CT, VAT and reporting rather than just one specialism.’

External advisers

There’s a role for external advisers too. Lloyd’s and RSA outsource some specialist foreign compliance work, and L&G outsources a few UK returns as well. ‘These are low added value activities, and outsourcing is cheaper,’ says Simon Burke. ‘Now the consultation process is more open, the big accounting firms no longer have access to information that’s unavailable to us. They can give us useful resources, like maternity cover, though.’ Mark Edwards cautions: ‘Lloyd’s uses the “big four” for projects, such as R&D tax credits. For ad hoc advice around the world we tend to use existing relationships as, given the unique features of the Lloyd’s Market, advisers must have a good understanding of the business model of the market.’

Jennie Rimmer has just insourced corporation tax compliance at Aspen. ‘I prefer to keep CT computations in-house – it gives us the discipline to look under the floorboards. Advisers certainly have a place, given their diverse skillsets and international reach. I’m looking for a long-term relationship, with honesty and integrity rather than a sales driven approach.’ Janis Webster adds: ‘I want robust, technically strong and practical advice.’

Tax directors enjoy the insurance world. ‘We’re helping our customers protect their families and save for the future,’ Simon Burke says. ‘A pension pot is no different from any other form of saving, but it has a tax wrapper round it.’ Jennie Rimmer thinks the industry offers a lot to those with a thirst for knowledge. ‘I learn something new every day. The London insurance market is absolutely unique,’ she says. Rob Clayton says: ‘Of course it’s a challenge to manage taxes within a tight capital and regulatory framework – but that’s what makes it interesting.’

Helen Blenkinsop

For a special report giving more detail on the tax issues facing the insurance sector, see ‘Sector focus: Insurance groups’ Tax Journal, dated 30 November 2012, p 22.