The UK's 2016 Budget includes a further increase to the rate of Insurance Premium Tax. Let's examine the details, and one important aspect of UK IPT legislation; the De Minimis concession.
In his 2016 budget announcement, Chancellor of the Exchequer George Osborne confirmed that the standard rate of UK Insurance Premium Tax (IPT) will rise by half a percentage point - from 9.5% to 10% - on 1 October 2016. However, transitional arrangements have been announced and exempt insurance contracts - and those that attract the higher rate - are unaffected.
Insurers operating the Special Accounting Scheme can apply the current standard rate (9.5%) to premiums received before 1 February 2017 relating to contracts entered into before 1 October 2016. The new standard rate will be applicable on all premiums received on or after 1 February 2017, regardless of when the contract was entered into.
For insurers operating the cash accounting scheme there are no such arrangements; all premiums that are taxable at the standard rate received on or after 1 October 2016 are to be taxed at 10%.
The De Minimis concession
The UK IPT regime is underpinned by some thorough legislation and guidance from the authorities. The HMRC Notice IPT 1 contains detailed explanations of what constitutes a taxable insurance premium, what classes of insurance are IPT exempt, policies that attract a higher rate, and various other items. The de minimis concession is one such item that can come into the equation for insurers underwriting a global insurance policy, and one that has come up regularly in the course of TMF Group's dealings with insurers and brokers.
If the total premium of an insurance contract is less that £500,000, and the UK taxable element of that premium is 10% or less, the contract meets the de minimis criteria, and you don't need to account for tax on that contract. It is worth noting that in co-insurance arrangements, the entire premium is subject to the de minimis test, rather than each insurer's proportion of the premium.
The presence of the de minimis concession can cause some accounting issues for insurers, particularly in cases where there are changes made to a contract after it has incepted. If, for example, a policy has met the above mentioned conditions at inception (and no IPT has been calculated accordingly), but additional premium has been collected after inception to reflect an increase in the sum assured which takes the overall premium above the £500,000 threshold, IPT now needs to be accounted for on the whole premium. IPT on the entire UK premium is now due on the tax point (contingent on the insurer's normal IPT accounting method) of the additional premium.
Another potential issue is the treatment of return premium. If a reduction in the overall UK premium means that a contract now falls within scope of the de minimis concession, a tax credit can be claimed for the amount of tax previously accounted for in the period where premium was repaid, or any later accounting period. The tax would then need to be refunded to the policyholder, causing additional administrative headaches.
The application of the de minimis concession is at the discretion of the insurer; some choose not to apply it for the reasons detailed above. This can lead to some confusion on co-insurance contracts – where multiple insurers are underwriting a contract where the UK portion of the risk is de minimis eligible. The complications of accounting for IPT on multiple insurers' share of the UK risk where additional premium takes a contract out of de minimis, and vice versa with return premium taking a contract into de minimis, means a clear and consistent approach is essential. It is our understanding that market practise is generally to follow the approach of the lead insurer.
If an insurer exclusively underwrites business which falls within the de minimis limits, they can apply to HMRC for a waiver of IPT registration. They nevertheless are required to inform HMRC that they are writing taxable insurance business. TMF Group's IPT Quote software has the de minimis concession built into its tax calculation engine. This allows insurers and brokers to ensure that if a contract meets the criteria; no tax is calculated (with the reason being clearly highlighted) on the UK portion of the risk at quote stage, avoiding the administrative headache of refunding IPT to the insured at a later date. TMF continues to work closely with key players in the insurance and broking market to ensure that the approach taken is clear and consistent.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
