Following the announced UK insurance premium tax (‘IPT’) increase from 5% to 6% from 4 January 2011, the market has been thrown into uncertainty with the HMRC’s policy on implementation. The impact is leaving brokers and their clients exposed to new tax liabilities.
When there is an IPT increase, doubt arises on the correct tax rate to apply because the rate is only set when the insurer actually writes up the contract in their accounting systems. The means that policies agreed by brokers and their clients which incept prior to the rate increase may actually be charged at the new higher rate if the insurer delays recording the contract. In such case, the insurer should revert to the insureds for the extra cash or make a commercial decision to absorb the tax rise.
To get round this HMRC and the Treasury usually allowed a special concessionary period of at least three months after the tax rise. This meant the contract attracted the correct old rate if it had already commenced prior to the tax rise. This enabled the industry to plan properly and make the necessary changes in their systems.
For this latest IPT rise, the tax authorities have so far not allowed such a concession. This may threaten the industry with planning difficulties and fresh tax liabilities. The brokers and insurers are now lobbying to have this change reversed, but to little effect so far.
Richard Asquith, MD of TMF VAT & IPT Services commented: “It seems a harsh change of policy. The timing of the increase on January 4 2011, with new year renewals coming-up, means the lack of clarity will hurt the industry. In the past, the tax authorities had assured the industry that it would consult if there was to be a change in the transitional policy, but this time, it does not seem to have happened, leaving the industry confused. A further sting from this could come with mid-term adjustments being at the new IPT rate.”
