Analysis: Where the squeeze is being felt from HMRC’s record IPT income

The ABI has deemed Insurance Premium Tax (IPT) the “mother of all stealth taxes” following HMRC revealing that the government’s income from IPT hit £6.2bn during 2018/19 (year ending 30 June).

This figure was 9.3% more than the previous year. With the total of IPT receipts increasing by £3.2m, and overall IPT receipts have increased by 109% in the last five years.

Back in June HMRC sought views on a range of issues including the use of insurers unregistered to pay IPT and whether brokers should be allowed to foot the bill. Insurance Times spoke to industry figures in the wake of the government releasing its call for evidence on how to make the collection of IPT fairer.

Now bearing in mind the HMRC’s record profit, Insurance Times looks into how brokers and insurtechs are affected.

James Dalton, director of general insurance policy at the Association of British Insurers (ABI), said that IPT rakes in record amounts for government on products people are either legally required to have or that most feel essential.

“The Treasury is taking in more money from people responsibly protecting themselves, their families and their belongings by buying insurance than it takes in from so-called sin taxes such as levies on beer or on gambling, which is why we will once again be warning the Chancellor come Budget time – IPT is unfair and must not be raised any further,” Dalton told Insurance Times.

Squeezing brokers

However, Justine McInnes, an indirect tax director at RSM explained that IPT is mainly a tax on business, not the consumer. In most cases, particularly the retail insurance market, the majority of the IPT cost on insurance policies is ultimately borne by the broker and/or the insurer.

But she told insurance Times that the impact of IPT will be disproportionately felt depending on which line the broker/insurer is operating in.

“Does this mean that the UK IPT regime puts certain brokers or underwriters at a competitive disadvantage? The answer is probably yes, because for those policy types where volumes are high, but margins are low (a key example being in the mainstream retail motor insurance market), the IPT cost will be relatively speaking greater than for policy types which have higher margins but lower volumes,” she said.

RSM is a provider of audit, tax and consulting services. It would like to see more transparency in policy documentation as to the party bearing the cost of IPT, as well as brokers being given the ability to claim overpaid IPT directly from HMRC.

Levelling the playing field

McInnes said that while one way to “level the playing field” may be to introduce different IPT rates for different insurance types and classes [the regime employed by a number of other countries], the administrative burden of doing so may well outweigh the benefits.

“Matters are not helped by current uncertainty around future rate rises and the future of the IPT “unbundling” legislation (the tone of HMRC’s recent IPT consultation suggests that plans may be afoot to withdraw this),” she said.

“Nevertheless, one thing is certain: HMRC are taking an increasingly keen interest in IPT and its revenue generating properties. Robust IPT processes and accurate IPT accounting are therefore more important than ever before.”

Insurtech burden

IPT also creates a unique burden on the insurtech sector.

In a statement regarding the consultation, trade association Insurtech UK said that it believes it is worth raising the need for further reform of IPT in the future because some of the proposed changes only intensify the challenging tax burden that is unique to the insurtech sector.

Further reform needs to address the major issue facing insurtech intermediaries – that they are affected by both IPT added to insurance premiums and the VAT on their expenses, which they are unable to reclaim, putting them at a disadvantage compared to equivalent non-insurance tech businesses.

The trade association said as insurtechs are still in their infancy compared to traditional insurers they feel increasing prices more acutely.

It recommended that all insurtechs that are involved in the distribution of insurance are able to offset the IPT they collect against VAT.

Insurtech UK said that it had raised this issue in its consultation response and hopes that the HMRC considers this.