The Budget 2018 has brought the good news that business rates for small shops will be cut, that there will be no increase in fuel duty, and that those hardy souls who can demonstrate the requisite levels of faith in the English weather will be rewarded by the relaxation of the rules on outdoor nuptials.
As usual though, attention has been refocussed on some less familiar, and somewhat contentious areas; one of these being Insurance Premium Tax (IPT).
While, contrary to the predictions of some, the standard rate of IPT has remained at 12 per cent, the mere rumours of an IPT rate rise which circulated prior to the Budget were sufficient to cause ripples of displeasure in certain circles.
Part of the reason for this may be that IPT has to be one of the most misunderstood taxes in taxation history, at least in terms of who actually bears the cost of the tax.
A persistent myth surrounding IPT is that the IPT cost is passed to the insured: in fact, it is usually the underwriter and where there is one, the insurance 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.
At a superficial level this is illustrated by the Association of British Insurers (ABI) premium tracker. This shows that notwithstanding the relentless IPT rate rises since 2011, motor insurance premiums have been falling since the beginning of 2018, and home contents insurance premiums have remained relatively stable since 2016.
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.
So, in practical terms, say a retail insurance policy is sold by a broker for a gross premium (GP) of £112, with this premium amount being calculated on the basis that it yields the minimum acceptable profitability but is the maximum that the insured will pay.
If the net premium (NP) payable by the broker to the underwriter is £50 (excl IPT), at an IPT rate of 12 per cent the broker will retain commission of £50 – that is £112 less NP of £50 less IPT of £12. However, where the IPT rate is 6 per cent, the broker will retain commission of £56 ie. £112 less NP of £50 less IPT of £6.
In other words, the broker’s commission amount is significantly impacted by the amount of IPT payable.
Similarly, if the underwriter sells policies directly without a broker, it will retain NP of £100 at an IPT rate of 12 per cent, but NP of £106 at an IPT rate of 6 per cent. In other words, the NP amount is significantly impacted by the amount of IPT payable.
In short, customers may or may not see a rise in their insurance premiums in the foreseeable future; if they do however, it cannot be attributable to an IPT rate rise in the 2018 Budget IPT. It is also unlikely to be wholly attributable, if attributable at all, to any previous IPT rate rises.