Osborne’s hike may be part of long-term drive to harmonise tax with rest of EU

Today’s Budget insurance premium tax hike may be part of a long-term Treasury plan to bring it into line with the higher rate in the rest of the European Union, Chartered Insurance Institute president Ashwin Mistry has warned.

Chancellor of the Exchequer George Osborne rocked the insurance world with his announcement in today’s Budget that the basic rate of IPT will be increased to 9.5% from the current level of 6%.

Ashwin Mistry, who is also chairman of the Brokerbility network, said that across much of the EU the rate of IPT is in line with VAT, which is currently 20% in the UK.

He said: “This is possibly a stepping stone to an EU model where IPT is roughly the same as VAT.”

Insurance Times revealed in 2011 that the Treasury had undertaken a review of comparative IPT rates across the EU, which showed that it was much lower in the UK than elswhere.

But Mistry described move to increase IPT rate as “a bit of a gamble.”

“This is effectively a 3.5% increase in insurance premiums which will be interesting to deliver to customers.”

However, taking into account the current soft market in insurance rates, Mistry said the increase in tax could be offset by falling premium prices, meaning that customers’ overall spend will remain the same.

He added that while customers would absorb the increase, they would put insurers under pressure to counterbalance it with savings elsewhere.

“Insurers will also be concerned about whether this represents part of a gradual move towards aligning the IPT rate with the VAT rate, something we have already seen in other EU member states.

Daniel Lyons, indirect tax partner at Deloitte, said: ”This is unlikely to be a popular measure, but is the first really significant increase in the standard rate of IPT since it was introduced in 1996.

“It brings the UK rate more into line with premium tax rates in other European Union countries.” 

But the CII president gave a warm welcome to Osborne’s announcement that the government is conducting a major review of claims management companies. He said: “It’s a blessing and definitely overdue.”