Insurance Premium Tax – 12%

Insurance Premium Tax – 12%

The new rate of 12% being applied depends on two considerations:

1. Whether the insurance cover begins before or after 1 June 2017.
2. Whether the premium in respect of that cover is treated as received (that is, has a tax point under either the special accounting scheme or cash receipt method) on or after 1 June 2017.

Unless the anti-forestalling rules apply, premiums with tax points falling before 1 June 2017 will be taxed at the old IPT rate of 10%, regardless of when the cover under the policy commences.

There is also a backstop date which means that all premiums treated as received, that is, with tax points under either the special accounting scheme or cash receipt method, that fall on or after the 1 June 2018 will be taxed at the new IPT rate of 12%, regardless of when the cover for the risks under the insurance policy began.

The increase will mean the rate will have doubled from 6% to 12% in under two years. In the 2016 Budget, insurance premium tax was increased by 0.5 of a percentage point, from 9.5pc to 10pc. At the time the insurance industry had feared a rise to 12.5pc. Mr Hammond said: “Insurance premium tax in this country is lower than in many other European countries, and half the rate of VAT.”

But that increase came on top of a rise in 2015 of 3.5 percentage points. This rise meant individuals paid an £13 on insuring the average car and £10 for a pet’s medical cover a year.

Huw Evans, director general of the Association of British Insurers, the industry trade body, said the move was a “hammer blow for the hard pressed”.

“Yet another increase … will hit consumers and businesses alike, hurting those who buy business, motor, property, pet and health insurance. It marks a doubling of insurance premium tax since last year,” he said.

The HM Treasury has linked the increase in tax to proposals in order to reduce whiplash claims which it believes will allow insurers to cut motor insurance premiums. Any reduction in motor insurance premiums might be offset by this increase in IPT. It will, however, inevitably result in a premium increase for insureds for other types of insurance, with the consequence being that some may fail to take out or renew essential, and often compulsory, insurances. It is estimated that the increase in the tax rates will raise an additional £680 million in 2017/18, rising to £840 million the year after.

Recommendation

We suggest you review your insurance arrangements and carefully evaluate the potential impact of this new IPT rate change on the overall cost of risk.

Key points to consider in managing your premium tax liability include:

• Use of deductibles/policy excesses or captives to reduce overall premium spend.
• Use of data and analytics to help set optimum insurance levels and support risk financing decisions to reduce premium spend.
• Claims analysis to ensure you are providing the insurance market with an accurate reflection of your risk, in order to maintain the total cost of risk at an optimal level.
• Review of premium allocation methodology to ensure that it is not only “just and reasonable” but also robust, defensible, and equitable.