In the increasingly complex world of IPT, understanding, assessing and applying the right taxes to new insurance products can be a challenge for insurers when complying with fragmented regulations.
As new risks continue to emerge, so do new insurance products. But how can insurers ensure insurance premium tax (IPT) is correctly applied? The three questions below provide some guidance and highlight the key points to be considered to ensure IPT compliance.
Step 1: What do local IPT legislations say?
IPT is an old tax in some territories. As such, the relevant legislations have often been drafted a long time ago (sometimes before World War II) and don’t always reflect the current insurance landscape. Classic insurance products including fire, liability or health insurance, will often be covered by the relevant legislation but emerging risks such as cyber insurance will not be specifically addressed. To apply IPT correctly, insurance companies are therefore left to classify their new product based on the existing local classification of risks. This may involve a premium allocation exercise to ensure that if several risks are to be covered, IPT is correctly applied to each of them.
Some territories provide administrative guidance which can help the insurance company understand how the IPT legislation should be applied. All too often however it’s driven by local insurance products that are usually specific to the domestic market and as a result global risks are not always addressed.
Step 2: Is it actually insurance?
A new type of cover provided by an insurance company doesn’t automatically mean that the product sold is insurance. As innovation drives the insurance world, it can easily cross its borders. Some new products recently introduced, such as parametrics insurance or surety products, are seen as enhancements of classic insurance covers. In order to assess whether they really are insurance products, the first step should be to check that they comply with the definition of insurance provided by local authorities. This is not always a straightforward exercise and is why some local administrations, such as HMRC in the UK, provide guidance and list the minimum criteria that should be met for the new cover written to qualify as an insurance product. This is an important point as once it is not classified as insurance, then IPT is no longer applicable, but clearly other indirect taxes may apply and need to be considered.
Step 3: How is the policy worded?
Lastly, it all comes down to the policy itself. The way it’s actually worded and how the risks are defined will be the legal basis for applying IPT and/or any other indirect taxes. Using cyber insurance as an example, if the risks listed in the contract are mainly defined as liability insurance, it’s likely that the premium will be fully taxed as a classic liability insurance policy. Should other risks also be covered, the premium might have to be split to apply other IPT rates and parafiscal charges or IPT exemptions on the relevant portion of the premium.
It’s not uncommon for the wording of a new type of cover to be challenged by tax authorities. This can lead to legal action that overturns how the tax was initially applied by the insurance company. A few years ago, the European Court of Justice did just this by reclassifying a mechanical breakdown cover, initially taxed under the VAT regime, as insurance, which was subject to IPT.
Assessing the correct tax application of new insurance products can be challenging, but some tools exist to help insurance companies be as compliant as possible.