Changes to insurance premium tax could lead to greater administration burden for the UK’s insurance sector
Brokers could be crucial for changes to insurance premium tax (IPT) going ahead post-Brexit, according to Russell Brown, senior IPT consulting manager at tax compliance and regulatory reporting software firm Sovos.
IPT is a UK tax that is added on to general insurance premiums. It currently has two rates – a standard rate of 12% and a higher rate of 20% for travel insurance, insurance sold with mechanical or electrical appliances and motor insurance sold for certain vehicles.
Following the UK exiting the European Union (EU) in 2020, UK insurers and intermediaries cannot passport their UK authorisations to write business in the EU.
As part of a daily tax report published by Bloomberg on 30 August 2022, Brown said: ”If changes to IPT are indeed made, the insurance sector will have to deal with an increased amount of administrative work.
”Today, the burden of ensuring that premium taxes and parafiscal charges are calculated properly on policies falls mostly on brokers. Therefore, broker consent would be required before implementing any administrative changes. Not only are IPT rates subject to change, but also the entire reporting process.
”For instance, in the UK, there is currently a requirement for a quarterly IPT return to be made, but this may be replaced by an annual IPT return, with quarterly payments on account for insurers that pay more than a specific sum of IPT annually.
”There may well also be changes to the data provided on returns. In other words, underwriters would have to devote much more time to meeting reporting requirements.
”Brokers will need to ensure that taxes are paid and correct records kept and subsequently passed on to insurers.
”One vital piece of information that brokers should save and transmit is the policyholder’s UK VAT registration number. This should be included in the policy documents supplied to them, in case any complications occur with HM Revenue and Customs.”
One challenge around IPT and Brexit includes declaring and settling pre-Brexit historical IPT liabilities incurred by UK entities, Brown noted.
Brown additionally believes that ”the UK’s exit from the EU opens the door to IPT rates being adjusted or removed altogether by the time the next general election rolls around before January 2025”.
He continued: ”In the long term, it’s possible that Brexit could lead to the government applying a standard rate of 20% VAT, overriding the current 12% IPT, to many taxable non-life insurance policies.
”In this scenario, if non-compliant insurers do not meet their obligations after switching from IPT to VAT, the policyholders could be held liable for any taxes due. A tax increase of 8%, on the other hand, would be incredibly unpopular among voters and could be perceived as a stealth tax that has been paid for through higher insurance premiums.
”An alternative option is to keep the current IPT rate of 12% across compulsory insurance for private individuals, such as home and motor insurance. With this approach, the government would still be permitted to charge 20% on other forms of insurance with no social aspect, such as directors’ and officers’ liability insurance.
”Unlike VAT, IPT is an irrecoverable cost to all consumers, whereas VAT-registered businesses can recover input VAT on premiums they pay.”
Insurance Times has contacted Sovos for further comment.