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

Sovos
July 15, 2020

This blog was last updated on 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 global provider of tax, compliance and trust solutions and services that enable businesses to navigate an increasingly regulated world with true confidence. Purpose-built for always-on compliance capabilities, our scalable IT-driven solutions meet the demands of an evolving and complex global regulatory landscape. Sovos’ cloud-based software platform provides an unparalleled level of integration with business applications and government compliance processes. More than 100,000 customers in 100+ countries – including half the Fortune 500 – trust Sovos for their compliance needs. Sovos annually processes more than three billion transactions across 19,000 global tax jurisdictions. Bolstered by a robust partner program more than 400 strong, Sovos brings to bear an unrivaled global network for companies across industries and geographies. Founded in 1979, Sovos has operations across the Americas and Europe, and is owned by Hg and TA Associates.
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