General insurance policyholders in the United Kingdom will be familiar with the additional charge on their insurance documents in respect of IPT or Insurance Premium tax but what is Insurance Premium Tax, what insurance policies does it apply to and who is responsible for collecting it?
The Insurance Premium Tax Regulations 1994
Insurance premium tax was introduced in the United Kingdom with effect from the 1 October 194 under Part III of the Finance Act 1994 and the details of the operation of the tax are specified in the Insurance Premium Tax Regulations 1994.
What types of insurance are subject to insurance premium tax?
Insurance premium tax is payable on general insurance risks where the risk insured is in the United Kingdom. There are a few exceptions to this, not relevant for the majority of individuals and businesses in the UK but they are;
- a contract of reinsurance
- a contract of insurance specified in part II of schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO)
- a contract of insurance relating to a risk situated outside the UK(d) a contract of insurance relating to a commercial ship, being a contract covering one or more of classes 1, 6 and 12 of part I of schedule 1 to the RAO
- a contract of insurance relating to a commercial aircraft, being a contract covering one or more of classes 1, 5 and 11 of part I of schedule 1 to the RAO
- a contract of insurance relating to a lifeboat, or to a lifeboat and lifeboat equipment, being a contract covering one or more of classes 1, 6 and 12 of part I of schedule 1 to the RAO
- a contract of insurance relating to foreign or international railway rolling stock, being a contract covering one or more of classes 4 and 13 of part I of schedule 1 to the RAO
- a contract of insurance relating to goods in foreign or international transit
- a contract of insurance relating to export finance
- a “block” insurance policy held by Motability which covers disabled drivers who lease their vehicles through this scheme, or
- certain insurance contracts relating to the Channel Tunnel.
How much insurance premium tax is payable?
There are two rates of insurance premium tax, the standard rate that applies to most policies of insurance and a higher rate that applies to specialist areas.
The standard rate is 6% payable upon the gross premium payable under the policy and the higher rate is 17.5% payable upon the gross premium.
What insurance products are liable to the higher rate of insurance premium tax?
The higher rate was introduced to deter suppliers of goods and services from value shifting between a primary product and an attached insurance product in order to reduce the tax payable. Policies attaching to motor vehicles such as warranties, MOT insurance, breakdown and the like and products attaching to electrical products such as extended warranty along with travel insurance policies are subject to the higher rate. The concern is that if the higher rate did not apply then the price of a holiday might be reduced and subsidised by a higher insurance premium which would attract a lower tax rate.
Who is responsible for the collection of insurance premium tax?
The tax is paid on the full premium payable by the client and paid over to the insurance company, either directly or via an intermediary, the insurance company is responsible for registering with HMRC and for the submission of tax revenues directly to HMRC. It is not the responsibility, in the vast majority of cases, of a broker or intermediary to pay the tax over to HMRC.
What is the tax on insurance premiums for?
There is a common misunderstanding that the tax pays for uninsured drivers or other uninsured risks, this totally incorrect. IPT is a sales tax much in the same was as Value Added Tax (VAT).
Insurance is exempt from VAT as it was felt when VAT was introduced that people should not be taxed on insurance premiums. It is a general philosophy of governments that people buying insurance is a good thing as it prevents a burden upon the state when things go wrong. This principle seems to have fallen by the wayside as successive governments of different colours have chosen to increase the level of Insurance Premium Tax.