HRMC Launches Consultation on the Operation of Insurance Premium Tax

Her Majesty’s Revenue & Customs (HMRC) – the UK Government department responsible for the collection of taxes – is undertaking a call for evidence to understand how the administration and collection of Insurance Premium Tax (IPT) can be modernised and how it can address emerging practices that may lead to unfair tax outcomes.

The aim of the consultation

• To assess that the IPT collection process is efficient and allows HMRC to collect the expected amounts of IPT, and
• To understand the new ways of writing insurance and ensure these are covered by the IPT legislation and HMRC guidance

HMRC highlights several areas where some improvements and clarifications could be achieved:

• Administration and arrangement fees: This part mainly deals with the commercial arrangements made between brokers and insurers. HMRC wants to avoid IPT being used as a tool for unfair competition on the insurance market.
• IPT return and exempt premiums: Insurers are not currently required to report their exempt premiums on the IPT return.
• IPT registration: HMRC is looking to assess several issues:  Is IPT group registration relevant or should it be aborted? Should a captive report to HMRC who its parent company is? How can insurance stakeholders (brokers, insureds, etc.) be aware whether an insurance entity is registered to file IPT in the UK? Should a public IPT register be created?
• Collection of IPT: IPT is normally declared by the registered insurance entity.  Should other ways of collecting IPT be investigated (e.g. from the insured and/or for the broker) in order to reduce the potential use of unregistered insurance entities?

This type of consultation is in line with HMRC’s culture towards IPT. Across Europe, HMRC is usually seen as one of the most proactive tax authorities with detailed guidance and a will to understand the evolution of the insurance market to ensure that IPT rules are aligned to new market practices. It also comes at a time when European Union (EU) territories are looking to collect more information from their taxpayers and particularly on their compliance processes.

Through the consultation, HMRC is hoping to identify or confirm any possible distortion to the insurance market arising from market practices that exclude some administration and arrangements fees. This could lead to some clarification of the IPT scope in either the legislation or the IPT guidance.

By giving the opportunity to the insurance market to share its experiences, HMRC is also seeking to reduce potential IPT gaps, like those arising from unregistered insurance entities and from new practices between brokers and insurers. On that note, it is worth noting that other EU territories already provide the possibility, or sometimes the obligation, for local brokers to register for IPT which allows local authorities to directly collect the IPT due.

For captive insurers we can see a few areas where they could be impacted. One outcome of the consultation may lead to the obligation to report more information on the IPT return, particularly the volume of international risks covered. A potential implication is that HMRC would have more information to be able to challenge premium allocations. This highlights the importance of evidence supported and regularly reviewed premium allocation rules within captive practices. Captives could also be required to report the name of their parent company. The aim is for HMRC to better understand the type of risks captive insurers are covering. For pure captives, this should not be a high administrative burden, but more clarity should be brought to third party captives or Protected Cells Companies.

In the UK, the insurer is liable to account for IPT. However, when HMRC is unable to recover any unpaid liabilities from the insurance company they could try and recover them from the insured. This would be the case when the insurance company is based in a jurisdiction where HMRC does not have any special arrangements to recover the IPT from the insurer. To further deter the use of unregistered insurers, HMRC is proposing to expand the scope of their powers to issue assessments for any unpaid IPT liabilities directly to the insured rather than to the insurer. In practice this would mean that HMRC could issue assessments directly to the captive’s parent company and not just to the captive itself in the event where the captive has not registered and settled IPT.

With new ways to write insurance being introduced (e.g. parametrics insurance, pay as you go insurance) and an increasing diversity of actors involved (classic insurance companies, pure captives, third party captives, PCCs, brokers and InsurTech companies to name a few), the challenge for HMRC will be to address all the specificities of this new insurance market while ensuring a reduced administrative burden for taxpayers.

By involving insurance stakeholders, HMRC is encouraging collaboration to identify ways in which IPT can be modernised to increase efficiency and transparency for both business and HMRC. The underlying concern of this consultation for insurance entities will obviously be an eventual future increase of the IPT rate in UK. While the terms set by this consultation do not provide clarity on that aspect, it will certainly provide food for thoughts for the government ahead of the next Budget announcement.