Response to HMRC IPT consultation

This page sets out our comments on the questions raised in the document entitled  'The operation of Insurance Premium Tax. Call for evidence' dated 3 June 2019 (the 'Consultation Document') which can be found here: The operation of Insurance Premium Tax - HM Revenue & Customs

We have started by setting out some general points and have then responded to each question in the order in which they have been raised. There are some questions on which we are not in a position to comment and we have stated where this is the case. 

Insurance Premium Tax: general points

Why are these general points important?

To respond meaningfully to the questions raised, it is essential first of all, to set out some general points which apply to this tax. We have therefore done so below.

Who bears the cost of IPT?

In our experience, the misconception that IPT is a cost which is entirely passed on to the policyholder continues to be prevalent – particularly, understandably, in the insurance broker sector. 

In fact, particularly in the case of retail policies, IPT cost is usually borne at least in part, by the broker and/or underwriter. 

This results in part from the longstanding commercial 'tradition' of including an obligation in the broker agreement that the broker is responsible for calculating the IPT on policies sold, and passing this IPT on to the underwriter. In addition, the methodologies for calculating broker commission and the highly competitive market - where the maximum gross premium which policyholders will tolerate often leaves little room for manoeuvre, also means that the broker is left with little option than to cover some of the IPT cost themselves.

Who bears IPT risk?

The above position also means that while it is the underwriter which is responsible for accounting for IPT to HMRC, in contract, the broker is liable for any errors which occur. In other words, if the underwriter accounts for the wrong amount of IPT as a result of an act or omission by the broker, it is the broker which is potentially liable to reimburse the underwriter for any IPT assessments and associated penalties and interest.

This 'quirk' of IPT is again, another element of the tax which is frequently misunderstood.

The basis of IPT

While VAT is of course, derived from EU legislation, IPT is essentially a domestic tax – with only the power to impose the tax contained in EU legislation, not the actual workings of the tax. 

As a result, it is heavily based on contract law principles – not on transactions, as is the case with VAT.

Responses to questions raised in the consultation document

Question 1: Is there evidence of a general shift in the insurance industry from commission-based broker remuneration to fee-based broker remuneration? If so, to what extent does this shift exist, and what do you understand to be the drivers behind it?

Over many decades, in commercial insurance distribution, there has been a trend away from commission-based towards fee-based remuneration of brokers.  

In particular, we are aware of anecdotal evidence that while for SME businesses, personal lines policies are still commission-based, for larger businesses, fee-based arrangements are still increasing, although it is difficult to determine the extent of the shift. In many cases a mix of fees and commission is present.

This started well before the introduction of IPT and it seems unlikely that IPT is a major driver – particularly given that as set out above, many brokers are unaware that they are bearing the IPT cost and there would therefore be no reason for them to try to reduce it.  

In addition, the conditions for achieving IPT-free and VAT-free administration fees are stringent (particularly for retail insurance contracts), and therefore the IPT benefits of implementing such structures may be outweighed by the disadvantages. 

In short therefore, any shift from commission based to fee-based arrangements may be being driven in part by IPT, but there are likely to be other commercial and regulatory factors which are having an equal and possibly greater impact.

Question 2: Do you have evidence showing that some structures which take advantage of fee-based broker remuneration can impact on competitiveness within the industry and to what extent do you consider this an issue?

It’s worth noting that the FCA has recently undertaken an extensive piece of research into this area which found that remuneration structures do not pose a systemic threat to competitiveness in the industry.

Question 3: If you think that administration and arrangement fees does pose a problem to the insurance industry, what views do you have on how this might be best addressed, including any views on the suggestions above?

See response to question 2 above.

Question 4: What information do you have to show the administrative impact on businesses from requiring the report of gross (general) written premiums? 

We have assumed that this is a reference to the requirement to report 'taxable premiums' on the IPT return. 

On the basis of this assumption, it should be noted that underwriters are in any event, required to report gross premiums in the returns which they submit to the PRA. 

It should also be noted that generally, the bordereau supplied by the broker to the underwriter will report the gross premium amount – thus providing a further source of information.

As a result, in our view the requirement to report gross premiums on the IPT return does not create any additional burden to that which already exists. However, it is likely that there would be an administrative impact on businesses if any additional IPT reporting requirements were implemented. The extent of this impact would depend on the types of requirements which were implemented.

Question 5: Is it feasible to split out gross written premiums for insurance contracts that cover non-UK risks and long term business from the return?

See response to question 4 above.

Question 6: Do you have any information that would help to quantify the administrative burden for groups to register each member separately for IPT? For group registrations, would you welcome removing the requirement for each group member to have a UK resident director?

We are not in a position to comment on this question.

Question 7: Do you have any information to help quantify the administrative impact on businesses from requiring captives to declare their parent?

We are not in a position to comment on this question.

Question 8: Do you have evidence to either support or contradict the view that unregistered insurers are an issue for [the] industry?

It is difficult to see how a regulated insurer could not be registered for IPT: due to the size of such businesses, their need to be fully regulated by the PRA, and the expertise of their tax teams we cannot envisage a situation where such businesses could 'slip through the net'.

There are however, two scenarios in which we can envisage that a business which is required to be registered for IPT might not be. These are as follows: 

Scenario one

In our experience, some businesses are not aware that they are supplying 'insurance' products and as a result, are accounting for VAT at 20 per cent on their products, as opposed to IPT at 12 per cent. 

Much of this arises as a result of complexities in the jurisprudence around what an 'insurance contract' is and how an 'insurance contract' is different from for example, a service contract. 

Given the relatively speaking, small proportion and size of businesses which supply these types of products, and given that the perceived need to charge VAT on the products may not give them a competitive advantage in any event, it is unlikely that this creates an 'unlevel playing field' for Indirect Tax purposes – although, we accept that the position is not ideal for a number of other reasons.

Scenario two

The other situation where this could arise is where an overseas established underwriter is writing UK-based risks and is unaware of the need to account for UK IPT (while possibly accounting for the IPT-equivalent in their own territory). It is difficult to ascertain whether this is an extensive problem and it may well be that any IPT loss is 'balanced' by IPT which is incorrectly accounted for by UK underwriters on overseas risks.

In short, from our experience of advising on IPT matters, in our view it is unusual for providers of insurance products to not be registered for IPT. Furthermore, where this does occur, we believe that the quantum of loss is relatively small – particularly as this loss may be countered in part by VAT being accounted for on the products in question and IPT being unnecessarily accounted for on other products offered by the provider.

Question 9: Would industry and consumers welcome a public IPT register?

It is difficult to see why this would be necessary or helpful. However, given that HMRC already hold this information and therefore the provision of such a register would not create any additional burden on businesses, we cannot envisage that it is something that insurers/brokers would object to.

Question 10: Is there evidence that a public register would assist with preventing unfair outcomes and deterring unlawful activity by enabling the detection of unregistered insurers.

See response to question 9 above.

Question 11: Changing the power of liability notices would encourage businesses to ensure that their insurer is registered for IPT. What would be the additional administrative work for this?

We refer to our comments at question 8 above in respect of unregistered insurers; we reiterate our view that relatively speaking, the Indirect Tax loss in both scenarios is likely to be relatively low. 

As a result of this, to impose a requirement on policyholders (or any other party) to account for IPT where the provider of the insurance products fails to do so, would appear to be disproportionate and unfair. 

We are not in a position to comment on the extent to which this would create an additional administrative burden for businesses.

In short, in our view imposing a requirement for the policyholder (or any other party) to account for any IPT for which the underwriter has failed to account is disproportionate to the risk which actually exists in this regard.

Question 12: Would brokers welcome the facility to pay for an IPT liability under limited circumstances?

See response to question 11 above.

Question 13: Would a facility for brokers to settle an insurer’s IPT liability discourage overseas insurers from registering for IPT and place an additional administrative burden on brokers?

We reiterate our comments above. In addition, in our view, it is usually a misunderstanding of the location of risk, as opposed to a deliberate attempt to underpay UK IPT which would result in overseas insurers underpaying UK IPT on UK risks.  It is therefore difficult to see how this measure would per se, discourage overseas insurers from registering for UK IPT.

Question 14: Are there any other areas relating to unfair outcomes or the administration of IPT which you believe HMRC should consider as part of this call for evidence?

In our view, brokers are frequently disadvantaged by the commercial and logistical operation of IPT. In this regard, we believe that the following issues should be considered:

  • As set out above, it is the broker which generally bears at least part of the cost of IPT. This is something of which policyholders are not aware – with the misconception often being that it is the policyholder which bears the IPT cost. As a result, in the interests of transparency, we believe that there should be a legislative requirement to identify the party which actually bears the IPT cost in the policyholder documentation - although we do accept that the significant additional administrative burden created may preclude such a measure. 
  • Likewise, where there has been an overpayment of IPT, the broker is in the hands of the underwriter; if the underwriter is not willing to submit an IPT claim the broker must resort to contractual measures to recover any overpaid IPT. 

In our view therefore, the broker should be entitled to submit the claim directly to HMRC and if they wish, to seek rulings directly from HMRC. This would also mean that making such claims/seeking such rulings would be far less burdensome for the underwriter.

We accept that if such measures were implemented, it may also be necessary to implement legislation enabling HMRC to assess brokers (as opposed to insurers) for underpaid IPT in certain circumstances – for example, where the broker has treated amounts received as outside the scope of IPT on the basis of the 'unbundling' legislation (s.72(1)(A) Finance Act 1994), but has not implemented the correct contractual documentation.

Question 15: Are there any issues not mentioned above that the government should take into account as part of this review?

The focus of this review appears to be on HMRC’s perception that there are a number of areas where IPT avoidance, or even evasion, is present. 

We are somewhat surprised by this approach; we consider that while there is a risk of IPT loss through genuine errors, the risk of IPT loss through avoidance or evasion is low – particularly when compared with certain other taxes.

In short, in our view, the consultation should focus on factors such as transparency around the party which bears the IPT cost and the logistical difficulties encountered by brokers in relation to IPT.

Question 16: Are there any further options or suggestions to tackle the concerns raised above that you would like the government to investigate further?

No further comments.

Question 17: Do you have any further comments?

No further comments.

Conclusion

IPT is a complex and unusual tax in that while it is the underwriter which is usually the 'taxpayer' for IPT purposes, it is generally the broker which bears at least part of the cost of the IPT.

While, from our experience, it is not an area where we have identified significant amounts of avoidance and evasion, it is one where there are a number of fundamental misunderstandings as to the logistics of the tax.

We would like to see:

  • More transparency in policy documentation as to the party which is bearing the cost of IPT.
  • Brokers being given the ability to claim overpaid IPT directly from HMRC and to seek rulings directly from HMRC.