In the 2015 summer budget, the Chancellor of the Exchequer announced that the standard rate of Insurance Premium Tax (IPT) would rise by 3.5% on 1 November 2015. It was suggested by the Chancellor that, as only one fifth of premiums are subject to the standard rate, the effect would be minimal. This assessment may be of little comfort to those insurers and policyholders who are selling or buying those one fifth of premiums to whom the cost and administration of the rate rise is anything but minimal.
Anyone who deals with UK IPT may be surprised by this statistic, but the reason is simple. Generally speaking, long-term (life) insurance premiums pertaining to UK risks are exempt from IPT and as long-term insurance accounts for around 70-75% of UK premium spend, this large portion of premium will not be impacted. However, when we consider non-life premiums, the exemptions are not so broad. Indeed, the main exemptions are limited to certain marine, aviation and transport contracts, with a few other odd exemptions such as risks relating to spacecraft.
This will leave premiums paid in respect of motor, property, liability, accident and health, amongst others, subject to the 58.3% rise in the tax rate. All are not insignificant sectors of the industry. It should be noted here that the higher rate of IPT, currently at 20% and applicable to travel insurance and a few specific motor or domestic appliance related insurances, will remain unchanged, as do all exemptions.
The government has also justified the rate increase stating that the cost of insurance premiums has fallen over the last few years and the UK’s insurance premium tax rate remains one of the lowest in Europe. Indeed, with rates such as 19% in Germany, 21% in Netherlands and 21.25% in Italy, as well as an emergent trend of IPT and VAT rates aligning, a further increase should not be casually dismissed. Within the first year of the rate change, the Office for Budget Responsibility predicts that the revenue generated will amount to at least £530 million, rising to £1.46 billion the following year. It could well be tempting for the Chancellor to try and boost these figures a little higher.
Which Accounting Scheme?
To minimise the impact of the increase and to ensure that there are no unexpected costs, insurers need to be on top of any rate change, understanding when and how it is being implemented. The approach taken by a government or tax authority can vary significantly.
In the case of the UK, insurers need to be clear which method they use to bring their IPT to account: the Cash Accounting Scheme (CAS) or the Special Accounting Scheme (SAS).
The default position is the CAS which requires an insurer to bring their IPT to account when they receive the premium, or when it is received on their behalf, for example, by a broker. However, an insurer is permitted to opt to account for IPT on the SAS which requires insurers to declare IPT when they write premiums as due to them in their books.
Cash Accounting Scheme
When it comes to the rate change, the CAS is fairly straightforward: all premiums collected by insurers or insurance intermediaries on behalf of the insurer, on or after the implementation date of 1 November 2015, are subject to the 9.5% IPT rate. Even if the policy inception/renewal and invoice dates are before the implementation date, if the premium is received on or after 1 November 2015, the new 9.5% rate will apply.
Potential pitfalls for insurers operating on the CAS will be, amongst others, delays in collecting premiums and premiums paid in instalments. As any premium paid after 1 November 2015 will be subject to the 9.5% rate, a premium could well be invoiced at 6% a number of weeks, or even months, earlier, but if the policyholder does not pay before the implementation date, there will be an extra tax cost. Premiums paid in instalments will also increase on the implementation date. A premium sold with monthly instalments due, could find the rate of IPT on the later instalments being under-invoiced by the insurer. In both cases the insurer will need to decide whether they go back to their customer to collect the additional amounts or whether they foot the bill themselves.
Special Accounting Scheme
Insurers operating on the SAS have a more complex transitional period. There is a four month concessionary period in place, starting on 1 November 2015 and ending on 29 February 2016, during which time the insurer may still be able to account for IPT at the old 6% rate. In order for an insurer to account for IPT at 6% during the concessionary period, a policy must contain these two elements: it must incept or renew before 1 November 2015 and premium must be written as due to the insurer before 2 February 2016. If a policy incepts or renews after 1 November 2015, it should be subject to 9.5% IPT even if the premium is booked before 29 February 2016. (There are some exceptions to this rule where it would be normal for the insurer to book the premium prior to inception). Any premium written as due after 29 February 2016 will be subject to the new rate.
Contrary to the insurers on the CAS, insurers on the SAS should not have the same considerations with regard to slow payments, though instalments could still provide a problem. By triggering the tax when the premium is booked, the insurer can effectively lock the rate even though the premium may not have been paid (although this might mean the insurer is funding the payment of the tax whilst waiting for premium payment). When it comes to instalments, depending on whether an insurer writes all of the premium as due at the start of the contract or if they write each instalment individually, will determine the tax treatment.
Whichever accounting scheme the insurer adopts, there are a number of specific rules they need to be aware of. The period between the announcement date (8 July 2015) and the implementation date (1 November 2015) is of particular interest to HMRC who have special rules for events happening during this period. Collecting or booking advanced payments ahead of the rate change so that the lower rate of IPT will apply may be disregarded by HMRC if the policy incepts after 1 November 2015. Equally, extending the existing cover of a policy, or selling a multiyear contract can be caught by similar rules.
Any premium paid back to a policyholder should be paid back with the same rate of IPT as originally declared. This can provide its own challenges, trying to track the original IPT and product reporting systems that can recognise this.
When a change of rate occurs, it has a ripple effect. Insurers must change their systems to implement the new rate and decide how to build in the complex transitory rules which should only apply for a few months. They must also change the details of their contracts and decide whether or not they will bear the extra 3.5% or pass it on to the insured. Short of going uninsured, it is difficult to avoid this increase. Anything done now may be good practice for further increases.