Insurance premium tax to increase to 6%
Emergency Budget 2010
In the recent emergency budget, Chancellor of the Exchequer George Osborne set out his Budget with a five-year plan to rebuild the British economy. As part of the plan to reduce the massive budget deficit of £155bn Osborne announced an increase in Insurance Premium Tax (IPT).
Who will be affected?
Insurers who receive premiums under taxable insurance contracts, and some intermediaries responsible for collecting taxable premiums.
What will change?
The standard rate of IPT applies to most general insurance, including property, motor and professional indemnity insurance. Life assurance and other long term insurance products are exempt from IPT.
The higher rate of IPT applies to travel insurance and to certain insurance (e.g. extended warranties) sold alongside motor vehicles and some consumer goods. It was introduced at 17.5 per cent in 1997 to stop VAT avoidance through ‘value-shifting’ between goods (subject to VAT at 17.5 per cent) and related insurance.
The introduction of the Finance Bill 2010 will provide for an increase in the standard rate of IPT from 5 per cent to 6 per cent and an increase in the higher rate of IPT from 17.5 per cent to 20 per cent in line with the increase in the standard rate of VAT.
Although the changes were announced on 22 June 2010 there will be a lead-in period of just over six months before the changes are implemented. Therefore the increases will have effect for premiums received or written by an insurer on or after 4 January 2011.
Current law and proposed revisions
IPT is charged as an inclusive amount within premiums received under taxable insurance contracts. Section 51 of the Finance Act 1994 provides the current higher rate of IPT as 17.5 per cent, and the standard rate of IPT as 5 per cent. Finance Bill 2010 will increase the standard rate of IPT to 6 per cent and increase the higher rate of IPT to 20 per cent.
HMRC have already warned that special measures are in place to prevent tax avoidance in relation to the period between the announcement of a rate change and the date the rate increase takes effect.