Aviva Predicts $486 Million Hit from U.K.’s Loss Relief Rules

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Ben Stupples

Aviva Plc, the U.K.’s second-largest insurer by market capitalization, expects a 400 million pound ($486 million) hit from new limits on the tax relief companies can claim on carried-forward losses.

The London-based insurer highlighted a 0.4 billion pound decrease to its capital reserves from the new laws, which take effect next month, according to the company’s 2016 annual report, filed March 9.

Announced by the U.K. government at the 2016 Budget, the new rules limit the losses from previous financial years, that companies can offset against their annual tax bill, to 50 percent of their profits. Previously, companies could receive tax relief equivalent to their total profits.

Granting companies tax relief from previous financial losses is a key part of the U.K.’s corporate tax system that ensures companies’ taxes reflect their long-term results, according to a May 2016 consultation on the laws from Her Majesty’s Treasury and Her Majesty’s Revenue and Customs.

Insurer Solvency

Applying to businesses with annual profits of more than 5 million pounds, the new laws apply only to 1 percent of U.K. companies, former Chancellor George Osborne said in his 2016 Budget speech. Yet insurance companies have been inadvertently penalized through the tax relief restrictions due to how they reduce both insurers’ regulatory capital and capital ratios, a key measure of their solvency.

Under Solvency II, introduced by the European Union last year, insurers in the trading bloc are required to hold sufficient capital in order to absorb losses form significant financial shocks. Carried-forward losses are recognized as a deferred tax asset on the balance sheets of insurers, and the 50 percent restriction on tax relief would reduce the required capital for future solvency tests.

“A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available, against which the unutilized tax losses and deductible temporary differences can be used,” London-based insurer Old Mutual Plc said March 9 in its 2016 annual report. “Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefits will be realized.”

Impact Mitigation

In the government’s May 2016 consultation, HM Treasury and HMRC requested information on ways to “mitigate” the impact of the new laws on insurers’ regulatory capital. The government, however, has yet to announce any mitigating circumstances for the U.K.’s insurers, according to Lindsay J’afari-Pak, a London-based U.K. insurance tax market leader at global tax and accounting firm PwC.

“Insurers are continuing discussions” of how the restrictions affect their capital “and are lobbying the government on that point,” she told Bloomberg BNA in a March 10 telephone interview.

In Aviva’s 2016 annual report, the company said it had included the 400 million pound expected impact from the new laws to show “a more representative view” of its overall solvency position.

Aviva’s Solvency II ratio was 189 percent at the end of last year, compared to 180 percent a year ago. A ratio of 100 is enough capital to withstand the kind of shock that happens every 200 years.

Hiking Insurance Premium Tax

But while the tax relief laws hamper U.K. insurers’ Solvency II compliance, they are most concerned with tax in relation to the taxation of insurance products, according to Craig Bourke, a London-based insurance company analyst at independent brokerage and investment bank Whitman Howard Ltd.

At the 2016 Autumn Statement, Chancellor Philip Hammond announced an increase in the U.K.’s insurance premium tax—the equivalent of value-added-tax for the U.K.’s insurance sector—to 12 percent from 10 percent, effective June 2017, to help fund the government’s spending commitments.

Hammond’s announcement in November 2016 came just eight months after former Chancellor George Osborne increased the same tax to 10 percent from 9.5 percent at the 2016 Budget.

“I actually think the second increase in the premium tax was more of a surprise,” Bourke told Bloomberg BNA in a March 10 telephone interview. “That one annoyed the industry more.”

Spokespeople at Aviva’s press office were Aviva unavailable March 10 for comment.

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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax