Insurance premium tax (IPT), which has now been in operation in the UK for 20 years, has raised about £35bn for the UK exchequer during that time. The higher rate of IPT was introduced in 1997 to deal with perceived VAT avoidance, and more recent changes to the UK IPT legislation have been aimed at countering perceived IPT avoidance. A number of commentators are in favour of the abolition of the tax, but this seems unlikely given the pressures on the public purse and unless the EU could be persuaded to remove the VAT exemption for general insurance.
It probably depends on who you are as to whether you raised a glass of something to celebrate the 20th anniversary of insurance premium tax (IPT), which came into effect in the UK on 1 October 1994.
In the intervening 20 years, this relatively innocuous ‘stealth tax’ has raised approximately £35bn for the UK exchequer. Kenneth Clarke (who announced IPT’s introduction in his 1993 Budget speech) can probably feel vindicated. He explained his simple task at the time, stating: ‘I need to raise revenue, but to do so in a way which does
However, industry groups have often
The supporters of this argument claim that IPT hits less well-off individuals and smaller businesses the
However, the abolition of UK IPT seems highly unlikely, given the sums of money it raises (currently £3bn a year) and the relatively low cost of administering the tax – it is collected by and paid over by the insurers. The UK government can also always point to the continent; as, in comparison to other European countries, the UK rate is still relatively low.
Twenty-seven European countries have some form of indirect taxation on insurance contracts. For example, in Germany the IPT rate matches the VAT rate of 19%, in
In a nutshell, IPT is a tax on insurance premiums, calculated broadly as a percentage of gross premiums (including commissions paid to brokers and agents). It is due on all insurance risks located in the
Although IPT may have some similarities with the EU VAT system, it is unlikely that VAT and IPT should arise on the same transaction, as insurance is specifically exempt from VAT under EU law. However, there can be examples where the two taxes interact.
One example of the interaction of VAT and IPT was the UK’s decision in the November 1996 Budget (Ken Clarke, again!) to introduce a selective higher rate of IPT to match the VAT rate on certain insurance sold with goods and services. This move, which introduced the higher rate of IPT from 1 April 1997, was designed to combat perceived VAT avoidance called ‘value shifting’ in certain retail sectors, including motor dealers, sellers of domestic products (e.g. white goods) and the travel industry. Value shifting involves the pricing arrangements being altered to allow for VATable goods and services to be sold at a low margin, whilst increasing the margin on
In the travel industry, this new selective rate created a mismatch. If you bought your travel insurance from your travel agent, it was subject to 17.5% IPT (the VAT rate in 1997), whilst the ‘direct’ sellers of travel insurance only had to charge 4% IPT.
This (obviously) upset the travel industry. One travel agent, Lunn Poly, sought to challenge the operation of this differential rate in the courts as
In the 16 years since the extension of higher rate IPT to all travel insurance, there have been no further additions to the higher rate of IPT. This suggests that HMRC’s policy in targeting perceived VAT value shifting may have been successful in its scope. This has been allied with changes to VAT law in 2004, which made certain value shifting by retailers a designated VAT avoidance scheme (SI 2004/1933).
Although new categories of higher rate IPT have not arisen since its adoption, there is often debate around what precisely may be included within the current categories. For example, the legal definition of domestic appliances that are caught by the higher rate (when insurance is sold through the relevant supplier) is any ‘electrical or mechanical domestic appliance which is ordinarily used in or about the home; or which is ordinarily owned by private individuals and used by them for the purposes of leisure, amusement or entertainment’.
HMRC has updated its list of examples over the years, and it now includes tablets and laptops as well as the more generic ‘computers’. However, insurance sold with mobile phones is not currently covered by the higher rate as mobile phones are primarily a means of communication. HMRC states that other handheld electrical devices that meet the relevant criteria and are not primarily a means of communication would be included. In the world of smartphones and social networking, what is ordinarily used at home and what passes for amusement and entertainment, rather than primarily being a means of communication, could be seen as a ‘grey’ area. For now, though, HMRC seems content to draw a relatively clear line between mobile phones and computers.
The higher rate of IPT was aimed at dealing with perceived VAT avoidance, but there have been more recent changes to the UK IPT legislation that have been aimed at countering perceived IPT avoidance. These came about specifically as a result of HMRC’s defeat at the High Court in the Homeserve litigation (Homeserve Membership Ltd v HMRC [2009] EWHC 1311 (Ch)). This case demonstrated that, for certain ‘commoditised’ insurance products, it was possible for an insurance intermediary to earn an arrangement fee not subject to IPT, rather than taking a traditional commission that was subject to IPT. On insurance products where the actual premium charged by an insurer is relatively low, and where the intermediary or affinity group selling (and/or administering) the insurance product to the final consumer makes a healthy mark-up, the IPT savings could be considerable.
This ‘unbundling’ of the premium, when properly implemented into separate contracts of administration and arrangement charged by the intermediary to the customer, was found to be effective by the courts in the case of the plumbing and drainage cover sold by Homeserve. However, HMRC responded by catching these separate fees in the IPT net through specific anti-avoidance legislation, where the insurance product underwriting does not involve a comprehensive risk assessment (see FA 2010 s 51).
Court cases involving IPT are comparatively few and far between when compared to VAT, but there are still areas of the legislation where the desire for clarity may lead to further litigation. One area of current disagreement appears to be between insurers, brokers
Although there are a number of commentators in
In the UK, the imposition of VAT on general insurance at an EU level would likely be bad news for UK consumers, as the current UK IPT rate is much lower than the standard VAT rate. Therefore, unless a reduced VAT rate (or even a zero rate) was introduced, IPT is
For businesses, VAT on insurance, which would be largely recoverable (outside VAT exempt sectors) rather than irrecoverable IPT, would constitute a financial gain. For insurers, whose own VAT recovery on costs is severely restricted by making VAT exempt supplies, a zero rate or reduced rate of VAT on general insurance would be attractive. This may be especially true for insurers that write international commercial insurance business and have the burden of apportioning premiums and registering and accounting for overseas premium taxes in a number of countries. However, for these insurers, the real target would be an EU wide abolition of premium taxes.
For the UK, with the public purse always under pressure for more tax revenue, the abolition of IPT is not on the horizon. In another 20 years’ time, we can perhaps expect a couple more increases in the standard rate of IPT in the UK, but it will probably still be less than 50% of the standard UK VAT rate.
Insurance premium tax (IPT), which has now been in operation in the UK for 20 years, has raised about £35bn for the UK exchequer during that time. The higher rate of IPT was introduced in 1997 to deal with perceived VAT avoidance, and more recent changes to the UK IPT legislation have been aimed at countering perceived IPT avoidance. A number of commentators are in favour of the abolition of the tax, but this seems unlikely given the pressures on the public purse and unless the EU could be persuaded to remove the VAT exemption for general insurance.
It probably depends on who you are as to whether you raised a glass of something to celebrate the 20th anniversary of insurance premium tax (IPT), which came into effect in the UK on 1 October 1994.
In the intervening 20 years, this relatively innocuous ‘stealth tax’ has raised approximately £35bn for the UK exchequer. Kenneth Clarke (who announced IPT’s introduction in his 1993 Budget speech) can probably feel vindicated. He explained his simple task at the time, stating: ‘I need to raise revenue, but to do so in a way which does
However, industry groups have often
The supporters of this argument claim that IPT hits less well-off individuals and smaller businesses the
However, the abolition of UK IPT seems highly unlikely, given the sums of money it raises (currently £3bn a year) and the relatively low cost of administering the tax – it is collected by and paid over by the insurers. The UK government can also always point to the continent; as, in comparison to other European countries, the UK rate is still relatively low.
Twenty-seven European countries have some form of indirect taxation on insurance contracts. For example, in Germany the IPT rate matches the VAT rate of 19%, in
In a nutshell, IPT is a tax on insurance premiums, calculated broadly as a percentage of gross premiums (including commissions paid to brokers and agents). It is due on all insurance risks located in the
Although IPT may have some similarities with the EU VAT system, it is unlikely that VAT and IPT should arise on the same transaction, as insurance is specifically exempt from VAT under EU law. However, there can be examples where the two taxes interact.
One example of the interaction of VAT and IPT was the UK’s decision in the November 1996 Budget (Ken Clarke, again!) to introduce a selective higher rate of IPT to match the VAT rate on certain insurance sold with goods and services. This move, which introduced the higher rate of IPT from 1 April 1997, was designed to combat perceived VAT avoidance called ‘value shifting’ in certain retail sectors, including motor dealers, sellers of domestic products (e.g. white goods) and the travel industry. Value shifting involves the pricing arrangements being altered to allow for VATable goods and services to be sold at a low margin, whilst increasing the margin on
In the travel industry, this new selective rate created a mismatch. If you bought your travel insurance from your travel agent, it was subject to 17.5% IPT (the VAT rate in 1997), whilst the ‘direct’ sellers of travel insurance only had to charge 4% IPT.
This (obviously) upset the travel industry. One travel agent, Lunn Poly, sought to challenge the operation of this differential rate in the courts as
In the 16 years since the extension of higher rate IPT to all travel insurance, there have been no further additions to the higher rate of IPT. This suggests that HMRC’s policy in targeting perceived VAT value shifting may have been successful in its scope. This has been allied with changes to VAT law in 2004, which made certain value shifting by retailers a designated VAT avoidance scheme (SI 2004/1933).
Although new categories of higher rate IPT have not arisen since its adoption, there is often debate around what precisely may be included within the current categories. For example, the legal definition of domestic appliances that are caught by the higher rate (when insurance is sold through the relevant supplier) is any ‘electrical or mechanical domestic appliance which is ordinarily used in or about the home; or which is ordinarily owned by private individuals and used by them for the purposes of leisure, amusement or entertainment’.
HMRC has updated its list of examples over the years, and it now includes tablets and laptops as well as the more generic ‘computers’. However, insurance sold with mobile phones is not currently covered by the higher rate as mobile phones are primarily a means of communication. HMRC states that other handheld electrical devices that meet the relevant criteria and are not primarily a means of communication would be included. In the world of smartphones and social networking, what is ordinarily used at home and what passes for amusement and entertainment, rather than primarily being a means of communication, could be seen as a ‘grey’ area. For now, though, HMRC seems content to draw a relatively clear line between mobile phones and computers.
The higher rate of IPT was aimed at dealing with perceived VAT avoidance, but there have been more recent changes to the UK IPT legislation that have been aimed at countering perceived IPT avoidance. These came about specifically as a result of HMRC’s defeat at the High Court in the Homeserve litigation (Homeserve Membership Ltd v HMRC [2009] EWHC 1311 (Ch)). This case demonstrated that, for certain ‘commoditised’ insurance products, it was possible for an insurance intermediary to earn an arrangement fee not subject to IPT, rather than taking a traditional commission that was subject to IPT. On insurance products where the actual premium charged by an insurer is relatively low, and where the intermediary or affinity group selling (and/or administering) the insurance product to the final consumer makes a healthy mark-up, the IPT savings could be considerable.
This ‘unbundling’ of the premium, when properly implemented into separate contracts of administration and arrangement charged by the intermediary to the customer, was found to be effective by the courts in the case of the plumbing and drainage cover sold by Homeserve. However, HMRC responded by catching these separate fees in the IPT net through specific anti-avoidance legislation, where the insurance product underwriting does not involve a comprehensive risk assessment (see FA 2010 s 51).
Court cases involving IPT are comparatively few and far between when compared to VAT, but there are still areas of the legislation where the desire for clarity may lead to further litigation. One area of current disagreement appears to be between insurers, brokers
Although there are a number of commentators in
In the UK, the imposition of VAT on general insurance at an EU level would likely be bad news for UK consumers, as the current UK IPT rate is much lower than the standard VAT rate. Therefore, unless a reduced VAT rate (or even a zero rate) was introduced, IPT is
For businesses, VAT on insurance, which would be largely recoverable (outside VAT exempt sectors) rather than irrecoverable IPT, would constitute a financial gain. For insurers, whose own VAT recovery on costs is severely restricted by making VAT exempt supplies, a zero rate or reduced rate of VAT on general insurance would be attractive. This may be especially true for insurers that write international commercial insurance business and have the burden of apportioning premiums and registering and accounting for overseas premium taxes in a number of countries. However, for these insurers, the real target would be an EU wide abolition of premium taxes.
For the UK, with the public purse always under pressure for more tax revenue, the abolition of IPT is not on the horizon. In another 20 years’ time, we can perhaps expect a couple more increases in the standard rate of IPT in the UK, but it will probably still be less than 50% of the standard UK VAT rate.
Insurance premium tax (IPT), which has now been in operation in the UK for 20 years, has raised about £35bn for the UK exchequer during that time. The higher rate of IPT was introduced in 1997 to deal with perceived VAT avoidance, and more recent changes to the UK IPT legislation have been aimed at countering perceived IPT avoidance. A number of commentators are in favour of the abolition of the tax, but this seems unlikely given the pressures on the public purse and unless the EU could be persuaded to remove the VAT exemption for general insurance.
