There are two types of no claims bonus. The first one is a refund of premium at the end of the policy. This happens when, for example, a discount is given if a policyholder doesn’t make a claim on that policy or makes a claim that is smaller than agreed in the policy documents. The insurer under the terms of the agreement then refunds a portion of the premium back to the policyholder.
The second type is where an agreement is made between the policyholder and the insurer to give a discount on any future premium payment, for example, in next year’s policy. This is given by reducing the amount of premium paid by the policyholder rather than a refund.
The implications for IPT across Europe
Both types of no claims bonus can cause tax issues. This especially applies where insurance premium tax (IPT) needs to be refunded where premium has been returned to the policyholder.
For example, where the premium has been refunded at the end of the policy’s term, some territories don’t allow a tax refund. This happens Italy where no refunds are given when the premium has been refunded because of a no claims bonus. There are exceptions where a refund is given but these are specific circumstances and tend to be given for administrative errors. In Germany, refunds of premium are allowed however in some circumstances where the refund doesn’t lower the risk then the refund is blocked.
In the UK, the issue that influences whether IPT can be credited is whether the payment made to the insured is actually and specifically covered within the insurance contract. If it is, then an IPT credit will be due, if not, then an IPT credit won’t be due. The UK tax authority, HMRC, would expect to see the actual provision in the insurance policy/contract and not in some other document or contract. And, if the insurer is using the special accounting scheme, HMRC would expect a credit to be shown in the company’s premium account to reflect the payment.
When the discount is given in the following years’ premium, because there is no refund of premium and therefore no refund of tax, most countries will allow this type of discount.
Some countries, for example, Malta and Ireland apply stamp duty on insurance premiums. With regard to refunds, even where the premium and risk have been reduced, if a refund of premium is given back to the policyholder it’s unlikely the tax will be able to be reclaimed. In Malta a reclaim of stamp duty is only allowed within the cooling off period. This is usually within the first 14 days of when the policy begins, and as such, the no claims bonus will not be affected by this. For Ireland, a fixed amount of stamp duty is applied per contract, rather than on the amount of premium paid, therefore, a reduction in premium won’t reduce the fixed amount of stamp duty.
It’s important to note that a refund of premium doesn’t always trigger a refund of IPT. Some tax regimes don’t allow a credit at all, and for others it will depend on the circumstances of the refund. Insurers should be aware of the different approaches that each tax authority takes regarding refunds to maximise tax efficiency and to minimise unnecessary costs.
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