The Chancellor announced on 23 November 2016 that the standard UK Insurance Premium Tax ("IPT") would rise by 2.0% to 12.0% with effect from 1 June 2017. This uplift will apply to all general insurance products and to all forms of transaction including new business, renewal and mid-term adjustment which are effective on or after the 1 June 2017.
Implications of the changes for ERS Brokers and Customers
We have commenced the work necessary to update our pricing models, document production and accounting systems to ensure that the increased rate of IPT is applied to all products and all transaction types in time for 1 June 2017.
There are however some additional considerations that we will need to work with to ensure that the appropriate rate of IPT is applied and collected during the transition from the current rate to the increased rate. We will also need to work with you to ensure that the changes in IPT are correctly provided for in respect of business written under various forms of delegated authority. These provisions are outlined in the following paragraphs.
Application of IPT on Transactions
ERS uses the "special accounting" scheme (SAS) to account for IPT to HMRC with the agreed tax point being the date ERS writes the premium in its books, this is equivalent to the processing date on an ERS policy administration system.
When the new IPT rate of 12% applies principally depends on two considerations:
- Whether the insurance cover begins before or after 1 June 2017; and
- Whether the premium in respect of that cover is treated as received before or after 1 June 2018.
We have summarised below how the change in the rate of IPT will be implemented by ERS considering the different forms of transaction and different transaction processing dates:
New business and Renewals
- Policy with an inception/renewal date before 1 June 2017 where the premium is processed on an ERS system up to and including 31 May 2018 are subject to 10.0% IPT, the old rate.
- Policy with an inception/renewal date from and including 1 June 2017 will be subject to 12% IPT, the new rate.
Additional premium
- If there is a mid-term adjustment (including fleet declarations) to an existing policy which commenced before 1 June 2017, any additional premium in respect of new risks for which cover began before 1 June 2017 will be liable to IPT at 10%, the old rate.
- If there is a mid-term adjustment (including fleet declarations) to an existing policy which commenced before 1 June 2017, any additional premium in respect of new risks for which the cover began after 1 June 2017 will be liable to IPT at 12%, the new rate.
- If there is a mid-term adjustment (including fleet declarations) to an existing policy which commenced after 1 June 2017, any additional premium will be liable to IPT at 12%, the new rate.
A "new risk" is cover not permitted under the original policy or is cover that would normally be written under a new contract of insurance.
Any additional premium for existing policies that incepted before 1 June 2017 that is processed after 31 May 2017 may be taxed at the old rate of 10% so long as the additional cover is permitted (allowed for) under the terms of the original policy and it is processed before 1 June 2018.
Return premium
- Return premiums, refunds or cancellations will be subject to the IPT rate charged on the original premium that is being adjusted, this will be the rate originally accounted for to HMRC and is not at the rate that is in force at the time the return premium is paid.
There may be a situation where the return premium involves different IPT rates for example 10% on inception premium and 12% for a mid-term adjustment premium. In these circumstances as the ERS policy administration systems are unable to apportion IPT the return premium will be at the 10% rate.
Post 31 May 2018
- From 1 June 2018, the new rate of 12% IPT applies to all premiums except return premiums, regardless of whether they are received in respect of new or existing risks or when the cover for those risks began.
Brokers Using Any Form of Delegated Authority With ERS
A number of brokers trade with us under various forms of delegated authority. We will be working with you to ensure that the change in IPT is fully and accurately provided for under these agreements.
The approach in respect of the main forms of delegated arrangement are as follows:
- ROLLOVER DEALS:
Where we have agreed a rollover deal which involves the migration of business at pre agreed price levels or percentage rate movements on an incumbent insurers premiums, these agreements must be managed in such a way to uplift the Gross premium to reflect the increased Insurance Premium Tax rate. This will ensure that the premium net of IPT is unaffected.
- RATE MATCH DEALS
As with rollover deals, all rate match arrangements are on the basis of matching premiums prior to the application of IPT. Therefore all such arrangements must be updated to ensure the correct application of the increased IPT rate and no erosion of the net premium payable to ourselves.
- RENEWAL RATE CAPPING
Where we have agreed facilities whereby renewal prices are set by one of our brokers using a fixed percentage rate increase on the expiring premium, these caps need to be adjusted to ensure that the increase in IPT is loaded into the renewal premium therefore not eroding the premium payable to ourselves.
- BROKER OWNED RATING MODELS
For brokers that we have approved the use of specific rating models which are owned and operated by those brokers, changes need to be made to the models to ensure that the increase in IPT is fully priced into the Gross premium.
- EXCEL RATE CALCULATORS
Where we have provided brokers with Excel based rating calculators for our specialist products, we will be updating all of these calculators to provide for the increased rate of IPT. These will be distributed in time for the change in tax rate. All previous versions of rate calculators should be withdrawn and not used for risks binding on or after the 1 June 2017.
If you have any questions or need any assistance in ensuring that the above actions are taken, please feel free to contact your Business Development Executive or relevant underwriting team.
