A recent case has demonstrated that it is possible to have a separate contract for the administration of an insurance policy that does not attract IPT, as long as it is sufficiently separate to the main insurance contract.
Homeserve, an insurance intermediary, arranged and administered cover for domestic emergency and call out repairs such as plumbing and drainage. Homeserve negotiated the cover with an insurer, offered the insurance-backed scheme to homeowners and, if it was taken up, administered the service. The homeowner was told in the marketing and contractual documents that they had two contracts, one with Homeserve for which the cost was £14 (part of a total payment of £59.99) and a separate contract with the insurer. The homeowner paid the total to Homeserve who retained £14 and paid the balance to the insurer. IPT was payable on the premium and the question was whether it was also payable on the admin fee retained by Homeserve.
The VAT and Duties Tribunal had held that IPT was payable: the arrangement gave rise to a contract between Homeserve and the homeowner that was not separate from the insurance contract for the purposes of IPT. Although Homeserve had taken pains to separate the contracts in the arrangements with the homeowner, the Tribunal ruled that the contract between Homeserve and the homeowner was dependent on and inseparable from the insurance contract and was not therefore separate from it.
On appeal, the High Court disagreed and held that it is possible to have a separate contract in these circumstances. The use of the words “separate contract” in the relevant IPT legislation meant no more and no less than a contract which is distinct from (in the sense that it is not the same as) the contract of insurance. Although made “in connection with” a taxable insurance contract, the contract for administration was a separate contract and the administration fee was exempt from IPT.
The decision, which may not be the final say if this matter is appealed to the Court of Appeal, will be welcomed by insurance brokers as it provides clarification on the question of when fees paid to brokers are exempt from IPT. The fact that a fee is paid as part of a single payment by the insured (which also includes the net premium for which the broker accounts to the insurer) will not necessarily mean that the whole sum is liable to IPT. Many brokers are already operating on a separate fee rather than brokerage basis, and this decision will create added impetus to that trend.
Where IPT is charged or potentially chargeable, brokers should be carefully examining their fee arrangements to ensure the risk of tax leakage is minimised.
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