These days, even by Orwellian standards, the extent of the “data trail” which we all leave as we go about our daily lives is astonishing.
This is not necessarily a bad thing: in fact there are many ways in which it can be beneficial. One of these which is the subject of this article, is motor insurance - where the ability to access information has in many ways, created a “win win” for the insured and the insurer.
For example, the insurer can now gain access to information about how safely the insured drives (using telematics devices), information about how many miles they drive (by means of a mileage tracker) and “real time” information about incidents in which the insured may have been involved (by means of a Dashcam).
As a result, the insurer is able to more accurately determine the level of premium payable and the extent of the insured’s liability on certain claims. Conversely, if their driving merits it, the insured can enjoy cheaper insurance premiums.
That said, from the insurance broker’s perspective, in terms of additional tax cost and working out who pays what tax, the introduction of the above devices (referred to collectively in this article as “Information Devices”) frequently creates something of an IPT and VAT “minefield”.
In this article we reveal what this “minefield” looks like, talk about how it arises, and also, what can be done about it.
IPT: exploding the myth
Before going on, we should talk briefly about the persistent myth which surrounds IPT: the common misunderstanding that IPT cost is passed to the insured.
In fact, it is usually the insurance broker (or underwriter where there is no broker) which bears at least some and often all, of the cost.
This position is a consequence of the need for brokers and underwriters to set insurance premiums at a level which maximises profitability, but which the often very competitive market, will tolerate.
From the broker’s perspective, the position also results from one of several IPT quirks: specifically, that although it is the underwriter which accounts for the right IPT amount to HMRC, almost without exception, it is the broker which under the terms of the broker agreement will be required to ensure that the underwriter is put in funds to do so.
At a superficial level this is illustrated by the Association of British Insurers (ABI) premium tracker which shows that notwithstanding the relentless IPT rate rises since 2011, motor insurance premiums have been falling since the beginning of 2018.
In practical terms, it is illustrated by looking at the following numerical example: say a motor insurance policy is sold by a broker for a gross premium of £1,120 (calculated on the basis that this amount yields the minimum acceptable profitability but is the maximum that the insured will pay).
If the net premium payable by the broker to the underwriter is £500 (excl IPT), at the current IPT rate of 12% the broker will retain commission of £500 – that is £1,120 less net premium of £500 less IPT of £120.
However, if the IPT rate were at its pre-2011 level of 6%, the broker will retain commission of £560 i.e. £1,120 less NP of £500 less IPT of £60.
In short therefore, the broker’s commission amount is significantly impacted by the amount of IPT payable.
Why is the IPT and VAT position so complex?
The starting point for identifying the IPT and VAT complications created by insurance policies which have an associated Information Device is to compare the contractual and supply chain which exists for a “standard” insurance policy where there is no Information Device, and compare it to one where there is.
So, for “standard policies” there will be an insurance policy between the insured and the insurer, for which, of course, the insured will pay a premium (in our example £1,120), and a broker agreement between the insurer and the broker – under which the broker will be entitled to commission for the policies which it sells (in our example, £500 after the broker has paid over the net premium and IPT to the insurer).
But add in the Information Device, and things get more complicated; first of all, to meet its obligations, the broker will need to provide the Information Device and usually, data analysis to “translate” the data procured from the device.
The broker will either supply these itself or buy them in from a third party provider. Either way however, the broker will incur VAT on the supply of the device and the supply of the data analysis.
The cost of the Information Device and associated data analysis will be passed on to the insured. Thus, using our example, let’s say the broker buys in Information Devices for £50 plus VAT per device and let’s say this is marked up to £112 when the cost is passed to the insured.
Let’s also say the broker buys in data analysis services for £50 plus VAT per annum, which is passed on to the insured at a marked up amount of £75.
The IPT and VAT complication stem from the question of which contract the amounts “belong” under. Often, the amounts are incorrectly treated as being further consideration for the supply of the insurance policy – thus, in the above example, the insured pays a total premium of £1,295.
As a result, in the above example, the broker suffers an additional IPT cost of £18.75 and incurs irrecoverable VAT of £20 on the amount which it pays for the Information Device and the data analysis services.
This position can result from poor contractual structuring, misunderstandings about the contractual terms and supply chain, or a combination of these factors.
The optimum VAT and IPT position
The optimum (and usually achievable) IPT and VAT position is to remove the additional IPT cost of £18.75 and reduce the irrecoverable VAT cost.
What can be done to achieve the optimum VAT and IPT position?
First of all, the existing supply chain and associated contractual documentation must be reviewed in order to see whether IPT has been overpaid and whether VAT has been underclaimed in historical periods. If it has, appropriate claims should be lodged with HMRC.
In terms of the prospective position, if required, the supply chain can be restructured and associated contractual documentation so that only VAT, not IPT is paid on the Information Device, and so that VAT incurred on the supply of the Information Device and data analysis is recoverable.
While there is a very significant risk that IPT will be overpaid and VAT will be underclaimed on insurance policies of this type, by using appropriate structuring and contractual documentation, the IPT and VAT cost can be minimised.