Insurance Premium Tax (IPT) is a sore spot for the insurance industry, one that turns each new budget cycle into a bated breath moment for players across the value chain as they wait to see what the year ahead will bring for insurance customers. In BIBA’s 2022 Manifesto, the association called for the government to reduce the rate of IPT to 10% in the next budget – lending an instrumental voice to the ongoing conversation around this tax.
Read more: BIBA Manifesto 2022: Managing risk
Speaking with Insurance Business, Russell Brown (pictured), senior IPT consulting manager at Sovos, highlighted that changes in IPT tend to be infrequent, particularly in contract to VAT which has seen rates rise and fall several times in recent news.
“IPT was last changed in the UK in 2017, raising the standard rate from 10% to 12%,” he said. “Between 2015 and 2017, the rate jumped from 6% to 12% - but this did not generate the amount of tax revenue that the government had hoped for. Non-admitted, non-EEA insurers are mainly to blame for this, as they did not always pay the tax. Policyholders can only be assessed by HMRC in rare cases for unpaid tax.”
However, Brown noted that the UK’s exit from the EU opens the door to IPT rates being revised or eradicated altogether by the May 2024 general election. The UK’s landscape has become more tumultuous since having left the EU, and so it is possible that Brexit could lead to the government applying a standard rate of 20% VAT, rather than the current 12% IPT, to many taxable non-life insurance policies.
“A change from IPT to VAT could mean the policyholders would be liable for any tax owed if non-compliant insurers fail to meet obligations,” Brown said. “In contrast, a tax increase of 8% would be unpopular with many voters and could be perceived as a stealth tax that has been paid for through higher insurance premiums.
“Another option is to keep the current 12% IPT rate on compulsory insurance for private individuals, such as motor and home insurance. This strategy would still permit the government to charge 20% on other forms of insurance that have no social impact, such as directors’ and officers’ liability insurance. VAT registered businesses would likely be able to recover input VAT on the premiums they pay, but this isn’t the case with IPT, as it is an irrecoverable cost borne by the consumer.”
That the UK is currently carrying out a consultation on changing IPT, and potentially incorporating it into VAT, has caused a lot of conversation across the market. Despite the consultation, however, Brown said there has been little mention from governing bodies about any upcoming changes to IPT. So, although this may be on the cards for the UK, it’s clear that it is not a priority at the moment with everything else going on in the world.
In the event that changes were made to IPT, Brown noted that the insurance industry would face an increased administrative burden. At present, he said, insurers rely primarily on brokers to ensure that premium taxes and parafiscal charges such as Fire Brigade Charges are calculated properly on policies. Any administrative changes would therefore need broker approval prior to implementation.
In addition to the IPT rates, he added, the entire reporting process is also potentially subject to change. An annual IPT return, for example, may take the place of quarterly returns, with quarterly payments on account for insurers who pay more than a certain amount of IPT each year, as well as modifications to the information reported on returns. In other words, underwriters would have to spend a lot more time complying with reporting obligations.
“What’s more is that changes to IPT will have an impact on any insurance options available in the EU, such as travel insurance,” he said. “Following Brexit, brokers have been much more careful in order to remain fully compliant in both jurisdictions. They’ve had to divide up policies and give them over to other European firms in certain situations, which means they can’t provide the same level of service as they could before leaving the EU.”
As such, a charge would eventually be passed on to end-users, Brown said, and in the current high inflationary climate insurance firms should think about the social implications resulting from this.
“Life and long-term insurance products, such as income protection and five-year permanent health insurance, which are deemed lifestyle choices and are exempt from IPT, may become subject to VAT,” he said. “To avoid discouraging customers from purchasing such cover, a lower rate of 12% may be charged.”
However, Brown emphasised that, as a result of these possible developments, insurers will rely on brokers to determine whether their customer is a company that is registered for VAT in the UK or a private individual. Therefore, brokers will need to be significantly involved in these negotiations, as they are responsible for ensuring correct taxation and keeping records, which they then pass on to insurers.
“One critical piece of information that brokers should retain and pass on is the policyholder’s VAT registration number,” he advised, “so that it is included in the policy documentation sent to them, in case any issues arise with HMRC.”
Looking to the future, Brown highlighted that while IPT is certainly an area in need of modernisation, it’s not part of the UK government’s plans under the Making Tax Digital scheme. The last consultation did raise the question of whether IPT needed modernisation, he said, but these initiatives weren’t welcomed by respondents.
“HMT and HMRC currently have more urgent matters to handle,” he said, “but they plan to continue consulting with interested parties, such as insurers’ representative bodies (the Association of British Insurers, the International Underwriting Association), brokers’ representative bodies (the London and International Insurance Brokers Association), and others, regarding this change.
“With the last consultation officially closed in February 2021, the results weren’t published until November 2021 - therefore it’s clear that this isn’t a current priority for HMRC. In the next phase, HMRC will conduct another consultation and organise regular meetings with Industry Liaison Group members. Although the process will take time, insurers and brokers in the UK would be wise to prepare for change in the years ahead.”