Brexit Contingency Plan: IPT implications

Alessia Mecozzi
April 10, 2019

Brexit has been the main topic on the news and in our conversations for almost three years, and if we thought we would get some answers by the end of March 2019, then we were definitely wrong!  There are now even more questions to answer and possible outcomes to plan for, but businesses cannot sit back and wait – insurers included.

The Brexit vote has caused great uncertainty as to whether UK-based insurers will be able to insure risks located in the remaining 27 EU Member States and whether EU-based insurers will be able to insure UK risks. To bring back some certainty, the insurance industry has taken steps to reassure customers and to sustain their businesses in the case of a hard Brexit.

The UK Financial Conduct Authority have introduced a temporary permissions regime for EU/EEA-based firms, allowing them to continue writing new and existing business until full authorisation is obtained (if needed, depending on the outcome of Brexit). For insurance premium tax (IPT), overseas insurers receiving, or intending to receive, taxable premiums in relation to risks located in the UK, are already required to register and account for UK IPT. The key point here is that the UK IPT regime is already built to accept tax settlement from insurers located anywhere in the world regardless of EU membership.  If Brexit doesn’t introduce any regulatory changes, tax restrictions or changes to the interpretation of location of risk rules, EU/EEA-based insurers should still be able to settle their UK IPT liabilities in the usual way.

On the other hand, UK-based insurers have had to implement strategies that would satisfy the requirements of all EU Member States in which they are currently passported, even if they are able to continue writing business in some of them.  For example, the Dutch tax authorities have contacted UK insurers registered for Dutch IPT, informing them that a fiscal representative must be appointed in case the UK is given third country status. 

Strategies for continuity

A common approach being taken to address regulatory restrictions is that of a portfolio transfer to an existing or newly-established EU-based affiliate company.  Another option is for the affiliate to write renewals and new business leaving the current contracts in run-off with the UK insurer. Mergers have also appeared on the list of Brexit strategies, together with re-domiciliation where the Head Office is relocated to another EU country – Luxembourg and Dublin have proven popular choices.

No matter which strategy is implemented, IPT is still due and tax registrations are not transferred together with the acquired contracts or company. If not already registered, the receiving entity must open its own, new tax registration in each of the EU Member States where the insured risks are located.  As per any company writing business in a new country, the process should be initiated as soon as possible. Each country has its own rules and time frames; leaving tax registration until after tax liabilities arise would most definitely result in late declarations. Additional costs to the company are sure to follow. Some countries require the insurer to register for tax purposes immediately upon obtaining the passport, others may be less strict about registration timing but firmer in applying penalties and interest for late filings. Tax authorities that allow insurers to settle insurance premium taxes without a valid tax ID can be counted on one hand and it is not the preferred approach, making it difficult to reconcile tax accounts.

(De)registration considerations

The focus is, of course, on the entity taking over the EU business, ensuring everything is in place and on time to satisfy stakeholders. But what happens to the UK-based insurer? Its IPT exposure in other EU Member States is nil or drastically reduced until the live contracts expire: should the tax registrations be maintained? The answer is, it depends. Companies that merged with an EU-based insurer should close their tax registrations and notify the various authorities about the merger, with the resulting entity taking on the tax compliance. For UK-based insurers that are not ceasing their activity but continue to operate in the UK and outside Europe, deregistering is probably the thing to do.  There are however two considerations.  Firstly, there isn’t any tax exposure remaining.  And secondly, if there are no plans for the UK-based insurer to write business in Europe – in the eventuality that a soft-Brexit allows this, or if the UK remains in the EU after all.

The impact on claims should also be considered before deciding to deregister, as well as the link with the passporting license. Otherwise, tax registrations could be maintained until there is certainty over the outcome of Brexit avoiding having to go through the painful registration process again. This would however mean continued tax compliance in those countries and for taxes for which nil submissions and / or fiscal representation are required.

Country specific hurdles

There are also country specific aspects to consider. Remaining prepayment credits for Italian IPT and Spanish fire brigade charge, and annual return submissions could give rise to the need to maintain the tax registration or at least delay the deregistration in these countries.

One final consideration relates to IPT reclaims when portfolios have been transferred to another insurer. Policyholders may cancel their policies or adjustments to the premiums may be needed. Even though in those circumstances the IPT reclaim may be generally allowed in a specific country, the tax authorities may be reluctant to reimburse IPT to an insurer that did not pay the tax originally. It would be the burden of the acquiring insurer to prove the contract transfer and that the tax was originally settled by the transferor.

As the insurance industry works hard to provide continuity for its customers during these uncertain times, clearly some thought must be given to the premium tax implications arising from the innovative and diverse solutions we see emerging in this arena.

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Alessia Mecozzi

Alessia is a Compliance Services Manager. She leads one of the insurance premium tax Managed Services Teams and is actively involved in managing client accounts. After graduating in Business and Management in Italy, she moved to the UK and joined Sovos FiscalReps in 2013, where she qualified as an accountant in 2018. She has over five years of experience in premium taxes across all European territories and is the subject matter expert in Italian and San Marino premium taxes.
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