Raising the rate of IPT again is the wrong measure in a cost-of-living crisis.
As the public looks to cut costs wherever possible under the impact of inflation, every line of expense in the household budget comes under scrutiny for its value. With the known pressures of energy bills and food inflation, householders look to ringfence priorities such as mortgage or rent payments and minimise outgoings elsewhere. With this comes the risk that vulnerable households might cut back on important protections such as pension contributions and insurance for their property or personal belongings. Against this background, I wanted to look at a key cost component of personal insurance which insurers cannot control: IPT.
There is much about Insurance Premium Tax that is not widely understood in the UK. It is charged on premiums received under insurance contracts which are deemed to be taxable. If the public think about IPT at all – a recent survey commissioned by the ABI found only 44% of those surveyed were aware of it – they might consider it as ‘VAT for insurance’.
Like VAT, but for insurance
While that’s naturally a simplistic view for several technical reasons, it is not without merit. Like VAT, IPT was widespread in Europe long before being introduced in the UK. Like VAT, IPT was introduced at a lower rate - 2.5% for IPT - before that rate was steadily raised to at least double the original. Like VAT, IPT is a transaction-based tax that is levied on the final consumer and cannot always be recovered by them. Like VAT, IPT has long-standing exemptions for complex reasons which defy simplification and are not widely understood by the public.
There are, of course, key differences. IPT was introduced in the first place because – under the EU Directives which governed VAT – insurance was VAT-exempt. When the then Chancellor Kenneth Clarke introduced IPT in his November 1993 Budget, the prevailing Treasury view was that, insurance being exempt from VAT, the sector was therefore ‘undertaxed’. This conveniently overlooked the fact that the consequences of insurance transactions being VAT-exempt was that insurers could not recover much of the VAT they were being charged on most of their business costs, from audit fees to window cleaning, to the benefit of the exchequer.
Another key distinction is that while such VAT on costs can be recovered by businesses providing taxable goods and services, IPT charged on insurance premiums cannot be recovered by any business or individual. Every penny of IPT accounted for goes to HMRC within months.
The minimum of hissing from the goose
As every tax expert knows, Louis XIV’s finance minister, Jean-Baptiste Colbert, famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” The modern form of this art is the ‘stealth tax’.
Over the past decade, the standard rate of IPT has increased in leaps - doubling in less than two years from 6% in October 2015 to 12% in June 2017. To address the emerging view that this was a ‘stealth tax’ which unobtrusively penalised the prudent householder or small business doing the right thing – indeed, doing what is legally required under the Road Traffic Act, as far as motor insurance is concerned – HMRC argued that IPT was “a tax on insurers”.
This took advantage of a lack of public awareness that IPT legislation (FA 1994, s49) specifically stated otherwise (“Tax shall be charged on the receipt of a premium”). Unsurprisingly, for those not used to consulting source legislation, HMRC’s public guidance on the subject, Notice IPT1 – said much the same (Section 2.1 What IPT Is. begins with the words “IPT is a tax on premiums”). HMRC’s primary means of explaining tax to the public and small businesses stated an inconvenient truth, best overlooked.
The plain fact is that IPT penalises people and businesses behaving responsibly in protecting their loved ones and property from risks both common and rare but serious, and - in the case of third party or employer liability - protecting others, too. The small business struggling with flood cover or the new driver engaging new responsibilities is impacted; IPT helps to price health insurance out of reach for many seeking to look after themselves (and relieve pressure on the NHS) and makes protecting the animal members of the family a more difficult decision. At a rate of 2.5%, this additional cost might be a marginal one – at 12% it is not.
That is why, during a cost-of-living crisis, IPT should not be increased in this year’s Autumn Statement – it should be frozen.