Post-Brexit changes to UK insurance premium tax


Uncertainty seems to be a feature of today’s world. More than two years ago, Brexit officially entered into force, but its economic and social implications are still being felt. Although the UK has taken back the reins of its own tax future, insurers still face many issues and concerns over Insurance Premium Tax, or IPT. At the time, the vote to leave the EU raised a number of questions for the industry, and these are still relevant.

Full digitization of IPT is a likely destination on the horizon. Insurers and brokers will be required to share transactional data with the government much more frequently. Also, as legislation evolves in various jurisdictions, it will be difficult to know which rules apply from one country to another and the potential consequences of getting it wrong will be severe.

In this article, we will look at some of the key challenges and changes that UK insurers may face in the years to come as a result of long-term Brexit.

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Following the Brexit vote, there was great uncertainty as to whether UK insurers would be able to insure risks located in the remaining 27 EU member states, as well as whether insurers in the EU would be able to insure UK risks. To reassure their customers, insurers must take the necessary measures to strengthen and sustain their business.

One area in particular that lacks clarity is that of radiation. If a business has merged with an EU-based insurer, it is important that they close their old tax records for the UK-based entity which were drafted on the pre-Brexit freedom of services basis and that it informs the competent authorities of the change in operating model. . This, in turn, will leave the resulting entity responsible for tax payment and compliance. Canceling these registrations in the EU is probably the best option for UK-based insurers who do not go out of business but continue to operate in the UK and outside Europe. This will help streamline remaining registrations and any other reporting requirements from a business perspective.

It is also important to consider the impact of UK company delistings on applications and the associated passport license. Tax records can be maintained until accounts are reconciled and closed. In such cases, however, some countries like Germany, Portugal and Spain, where the license is still in effect with the regulator, require tax compliance to be maintained until the license is revoked.

Historical liabilities

As is now known, UK insurers can no longer underwrite contracts in the EU on the basis of freedom of services, as the Brexit agreement did not include relevant provisions for financial services. With this in mind, another potential area of ​​uncertainty for many UK insurers is how to report and settle historical IPT liabilities incurred by their UK entities prior to Brexit taking effect on 31 January 2020.

How do UK insurers file historic IPT in the EU? This varies from country to country, as do most related compliance topics. As a general rule, EU authorities understand that commitments entered into on the basis of freedom of services may still exist at this stage and therefore there should be a way to facilitate the declaration of these commitments. Historical liabilities in the Netherlands, for example, can be disclosed through additional declarations. Similar processes can also be initiated in Germany, Finland and Luxembourg.

UK entities may find it more difficult to identify historical liabilities if they were not originally registered or if they have already de-registered from the country where they established these liabilities. For example, companies in the UK wishing to declare their IPT in Slovakia cannot register in the country. However, if only historical liabilities need to be reported, the Slovak Tax Authority has confirmed that insurers can appoint a representative to settle these amounts without an IPT registration being formally completed.

Although the following advice may contradict the delisting advice given above, we recommend that as a general rule, if a UK insurer anticipates that it will have historical liabilities in an EU jurisdiction, it should remain registered there until until the final accounts have been closed and any undeclared liabilities are discovered and fully disclosed. Once this is complete, the unsubscribe process can then be performed, if required. Now that more than two years have passed since Brexit took effect, some countries, for example Portugal and Spain, have started to automatically delist UK entities with active licenses in those jurisdictions.

It is strongly recommended that you find a representative who can advise you on how to report and proceed with historical IPT liabilities depending, if possible, on the laws and guidelines of the country concerned.

Possible changes

If changes are actually made to the IPT, the insurance industry will face an increased administrative burden. Today, the burden of ensuring that premium taxes and parafiscal charges are correctly calculated on policies falls primarily on brokers. Therefore, broker consent would be required prior to the implementation of any administrative changes. Not only are IPT rates subject to change, but so is the entire reporting process.

For example, in the UK there is currently a quarterly IPT reporting requirement, but this can be replaced by annual IPT reporting, with quarterly installments for insurers who pay more than a specific sum of IPT per year. There may also be changes in the data provided on returns. In other words, underwriters would have to spend a lot more time fulfilling reporting requirements.

The changes to the IPT will also influence all insurance choices offered in the EU, including travel insurance. Since Brexit, brokers have exercised greater caution in order to remain fully compliant in both jurisdictions. This could negatively affect the level of service they provide compared to before the UK left the EU as in some cases brokers have had to split policies and transfer them to other European companies.

Products considered lifestyle choices and exempt from IPT, such as income protection and permanent health insurance of at least five years, as well as other life and long-term insurance, may be subject to value added tax. Charging a VAT rate of less than 12% is one possibility, so as not to deter people from taking out this type of insurance. However, in light of these potential changes, insurers will have to rely on brokers to determine whether their client is a UK VAT registered business or an individual.

Brokers will need to ensure that taxes are paid and that correct records are kept and then forwarded to insurers. One vital piece of information that brokers need to record and pass on is the policyholder’s UK VAT registration number. This should be included in the policy documents provided to them, in case any complications arise with HM Revenue & Customs.

Preparing for the future

Changes in the IPT have been few and far between, especially compared to the tumultuous VAT landscape. However, the UK’s exit from the EU opens the door for IPT rates to be adjusted or completely abolished by the next general election before January 2025.

In the long term, it is possible that Brexit will lead the government to apply a standard VAT rate of 20%, replacing the current IPT of 12%, to many taxable non-life insurance policies. In this scenario, if non-compliant insurers fail to meet their obligations after the change from IPT to VAT, policyholders could be held liable for any taxes due. An 8% tax increase, on the other hand, would be incredibly unpopular among voters and could be seen as a stealth tax that has been paid for by higher insurance premiums.

Another option is to maintain the current IPT rate of 12% on all compulsory insurance for individuals, such as home insurance and car insurance. Under this approach, the government would still be allowed to charge 20% on other forms of non-social insurance such as directors and officers liability insurance. Unlike VAT, IPT is a sunk cost for all consumers, while VAT-registered businesses can recover input VAT on the premiums they pay.

In these uncertain times, as the insurance industry strives to ensure continuity for its customers, it is clear that consideration must be given to the IPT implications of the innovative and diverse solutions that are emerging in this space. With an increasing number of possible outcomes to plan for, businesses, including insurers, cannot afford to sit idly by and wait.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Russell Brown is Senior Consulting Manager IPT at Sovos.

The author can be contacted at: [email protected]

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