In September, 2016 the Chancellor of the Exchequer announced in the autumn statement that the standard rate of Insurance Premium Tax (IPT) will increase from 10% to 12%, with effect from 1 June 2017.
The higher rate of IPT for insurance products supplied with selected goods and services (such as all travel and certain motor and domestic appliances) remains unchanged at 20%
The latest IPT increase will apply to premiums treated as received on or after 1 June 2017, except where insurers operate a special accounting scheme.
However all premiums will be subject to the new rate from 1 June 2018, regardless of when the contract was entered into.
Over the past several months, along with industry representatives (ABI, BIBA, IUA, LIIBA, & Lloyd’s) we met HMRC and Treasury officials to discuss ways of improving the implementation arrangements that have been employed for previous rate rises. The key points clarified by those meetings are that:
- The existing rate (10%) applies for policies incepting before 1 June 2017 where the premium is received (under either accounting scheme) before 1 June 2018;
- The existing rate applies for policies incepting before 1 June 2017 where additional premium received before June 2018 is not in respect of a ‘new risk’ for which a new policy has been issued. The trigger for a ‘new risk’ is noted in more detail in the attached document together with examples of its application;
- The existing rate applies for policies incepting before 1 June 2017 where the ‘new risk’ is contemplated in the original policy and is placed on cover during the policy term and results in additional premium received before June 2018;
- The new rate of 12% applies for all premiums received after 1 June 2018 due to ‘hard stop’
As should be noted that if there is a mid-term adjustment (MTA) to an existing policy which incepted before 1 June 2017, any additional premium received by insurers in respect of ‘new risks’ for which cover began after the implementation date of 1 June 2017 will be liable to tax at the new rate. An MTA will not be in respect of a new risk if it relates to cover already included under the policy or to risks already envisaged by the insurer to be under the policy when the cover begins.
Premiums Paid by Instalment:
Where premium instalment payments are made in respect of risks which incept before 1 June 2017 and are received by insurers (i.e. have a tax point) before 1 June 2018, then they are liable to IPT at the old rate of 10%.
Where the period of cover relating to risks in an insurance contract begins on or after 1 June 2017, and the policyholder pays by instalments, then any instalments that fall on or after 1 June 2017 will be due at the new rate of 12%.
If any instalments that are received by insurers (i.e. have a tax point) on or after 1 June 2018 will be at the new rate of 12%, regardless of when the cover for the risks in the contract began.
Return premium should be processed using the tax rate that applied to the original transaction being adjusted. This is irrespective of the inception date of the risk or process date.
HMRC also highlighted anti-forestalling legislation to deal with attempts to avoid the increased rate by insureds extending cover and advancing premium payments or underwriters changing their normal practices.
Members should be aware that in the past Insurers have picked up any IPT discrepancies, this may not be the case post June 2017. Consequently if there is any doubt as to the rate applicable then members should seek clarity from insurers as to the correct levy of IPT to be charged.
It is also recommended that members consult with their software providers to ensure that they do not unilaterally increase all premiums post June 2017 as this could be seen as a breach of TCF if the lower rate is more appropriate
HMRC Policy Paper on the IPT increase to 12% (5 December 2016)
HMRC Guidance on IPT (28 February 2017)
HMRC’s anti-forestalling legislation (8 March 2017)ITP Increase Update
(Microsoft Word Document)