U.K. Royal London Group Wants Clarity on Deferred Shares Tax

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By Ben Stupples

Aug. 16 — Royal London Group, the U.K.’s largest mutual insurance company, has called on the government to clarify whether corporate taxes will be due on a new form of capital for mutual insurers.

“As far as tax goes, it’s clear that it’s unclear,” Gareth Evans, Royal London’s head of corporate affairs, said about the Aug. 4 consultation by Her Majesty’s Treasury.

The treasury agency is consulting on a new type of capital, known as mutually deferred shares, that will be available to U.K. mutual insurers and societies, such as Royal London Group and Liverpool Victoria Friendly Society.

“We would need to have some degree of certainty if we were to go ahead and do this, and we’ll be asking the Treasury for clarity.”

The new shares would grant mutual insurers—which are owned by their members and build up a surplus of capital through retained profits—access to external investors.

Basic Principle

Currently, the capital surplus of a mutual insurer is exempt from U.K. corporation tax and any dividend distributions to members are similarly exempt from income tax, since members don't engage in a trade that makes a profit.

Yet issuing mutually deferred shares to external investors, who would seek to profit from their involvement, challenges both the “basic principle” of mutual insurers’ member-based ownership model and their current tax exemptions, the Treasury said in the consultation.

“At least to the extent the mutual’s activities are intended to generate a surplus for distribution to external investors, the mutual is now engaged in trade to make a profit,” the Treasury added. “It may be difficult to sustain the present tax exemptions for mutuals in these circumstances.

“There’s a competitive advantage to a mutual not paying tax on its surplus, but the disadvantage is that it’s very hard for them to have external capital,” said Bill Dodwell, head of tax policy at Deloitte U.K. “The government is saying that if you need more capital to fund your business, one of the consequences is that there may be a tax cost.”

Highly Complex

In March 2015, the U.K. government passed the Mutuals’ Deferred Shares Act, permitting mutual businesses to raise external capital through two forms of mutually deferred shares: preference or ordinary shares. Keeping in line with mutual insurers’ ownership structure, investors purchasing the shares will only be entitled to one shareholder vote irrespective of how many shares they purchase. Yet mutual insurers can only issue one of the share types, as introducing both could be “highly complex” and ultimately detract from the benefit of the new laws, the Treasury said in its consultation.

Liverpool Victoria, the U.K.’s largest “friendly society” with 14.5 billion pounds in total assets, addressed how a mutual business structure restricts access to capital in its 2015 annual report. Capital comes primarily from annual retained profits minus any distributions to members, which ultimately limits growth opportunities and the ability to withstand economic shocks, the group said in its report.

Mutual businesses can also issue debt to fund their financial activity, and in 2013, Liverpool Victoria issued a 350 million pound ($454.5 million) bond which matures in 2043, according to data compiled by Bloomberg BNA.

Nationwide Building Society

The Treasury’s consultation on deferred shares for mutual insurers follows similar legislation introduced three years ago for the U.K.’s customer-owned lenders.

In December 2013, Nationwide Building Society became the first U.K. lender to get access to external capital, and raised 500 million pounds through issuing 5.5 million core capital deferred shares (CCDS), according to its website. Allianz SE, the German-based insurance and financial services company, is the majority shareholder with 15 percent of Nationwide's CCDS, according to data compiled by Bloomberg BNA.

A key difference between customer-owned lenders, otherwise known as building societies, and mutual insurers is that building societies pay U.K. corporation tax on their profits, said Deloitte’s Dodwell. “Their profits have for many years been subject to corporation tax,” he said on building societies. “In that sense, friendly societies and mutual insurers are an anomaly through all of that.”


Mutual businesses are owned by their members, who are also their customers, and have a community-based business model that spreads risk across their membership. Unlike investments in shareholder-owned companies where customers and owners are separate, mutual organizations aren't created for financial profit and adopt a long-term strategy that seeks to establish a surplus of funds—one key measure of their financial strength—that can be used for insurance claims.

The new form of capital is categorized as deferred shares because it ranks behind the financial interest of a mutual insurer’s members and creditors. As an extreme example, the consultation says that mutual insurers risk losing their mutual status if their capital base comes mostly from mutually deferred shares as part of their built-up surplus would go to external investors.

Royal London Group

But Martin Shaw, chief executive of the U.K.’s Association of Financial Mutuals, doubts mutual insurers would ever raise enough external capital through mutually deferred shares to fall into that category, citing Liverpool Victoria and Royal London Group—which have total assets of 14.5 billion pounds and 74.9 billion pounds, respectively, according to their 2015 annual reports.

“Mutuals will probably use the capital for expansions and acquisitions that would be quickly utilized by the businesses,” he said. “I can't envisage a situation where they would raise enough capital.”

“One interesting thing could be the impact of Brexit on the design depending on how long the process takes,” said Stephen Brown, director of financial services tax at Mazars. “It may be that they will need to give less consideration to things like State Aid if they look to make the new regime more generous in terms of tax treatments.”

”We’re very supportive of the Mutuals' Deferred Shares Act in principle,” a Liverpool Victoria spokesperson said in an Aug. 15 e-mailed statement. “We’re currently working through the consultation documentation and will be looking to provide a formal response to the Treasury in the coming weeks.”

Mutual societies and friendly societies operate similar businesses but are incorporated in the U.K. under different legislation. The only exception is Birmingham, England-based Wesleyan Assurance, which is incorporated under a separate set of rules that dates to the 19th century.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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