Pay-Per-Mile Car Insurance – How Do You Tax That?

Sovos
July 15, 2020

Car insurance premiums are always making headlines. With the cost of insurance for younger drivers continuing to rise, a new generation of drivers are questioning the need to own a car.

Many drivers who live in the city or commute often only use their cars on weekends, but the cost to insure a car that is sitting idle most of the time can seem an unnecessary expense for many.

Insurers have seen a gap in the market and are now offering pay-per-mile insurance – providing even more affordable and flexible insurance than previously offered, targeted at infrequent drivers who still need a car.

But how do you calculate and accurately tax a constantly evolving premium that varies customer-to-customer?

IPT for pay-per-mile policies

Pay-per-mile is essentially another form of telematics insurance, using technology to monitor how many miles a driver travels in a month and then building a policy that matches that. 

The idea is that the fewer miles a driver travels, the less likely they are to be involved in an accident and therefore need to claim. The policy’s cost is split between a fixed cost for when the car is stationary plus the cost per miles travelled. The challenge for insurers is tracking and updating the premium tax owed on the cost per miles travelled.

Depending on when IPT is filed and how frequently the pay-per-mile policy is updated, the two could be out of sync.

Although insurers are likely to use estimates, there is still potential for over or under paying premium tax on pay-per-mile policies because there’s no definitive number across a customer base. If this were to occur on all pay-per-mile policies it could significantly add to the costs borne by the insurer, especially as car insurance IPT rates continue to be one of the highest.

The complications can further increase with an insurer operating in multiple jurisdictions as IPT on vehicles is fragmented and varies from country to country. There is also a higher risk of human error with more changeable policies, so it’s important that taxes are managed and accurately filed to avoid mistakes.

This new breed of insurance has a wealth of benefits for policyholders and insurers alike, but it’s important for insurers to consider how to correctly manage and process this new style of policy.  This is particularly relevant when it comes to accurately calculating the IPT due to ensure premiums are competitive and to protect profit margins, but also from a tax compliance perspective.

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Author

Sovos

Sovos is a leading global provider of software that safeguards businesses from the burden and risk of modern transactional taxes. As VAT and sales and use tax go digital, businesses face increased risks, costs and complexity. The Sovos Intelligent Compliance Cloud is the first complete solution for modern tax, giving businesses a global solution for tax determination, e-invoicing compliance and tax reporting. Sovos supports more than 7,000 customers, including half of the Fortune 500, and integrates with a wide variety of business applications. The company has offices throughout North America, Latin America and Europe. Sovos is owned by London-based Hg. For more information visit www.sovos.com and follow us on LinkedIn and Twitter.
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