HM Revenue and Customs (HMRC) announced that Insurance Premium Tax (IPT) will increase from 6% to 9.5% (standard rate) from the 1st November 2015. There is no change to the higher rate of IPT.
Q1) What is the transitional period?
The transitional period runs from 1st November 2015 until 29th February 2016. This is applicable to insurers who use the Special Accounting Scheme and RSA use this.
Under the Special Accounting Scheme the tax point for IPT is the date an insurer writes the premium in their records. This would mean that in normal circumstances, all premiums written in RSA systems on or after 1st November 2015 would be subject to the new rate of IPT.
However, the transitional period allows insurers to write premium for policies that have incepted or renewed prior to 1st November 2015 at the old rate provided it is processed in RSA systems by 29th February 2016. This assists in circumstances where policies sold by brokers or intermediaries correctly at the old rate but not notified to RSA until after the date of change of rate of IPT and does not create an additional tax liability for either RSA or the customer.
IMPORTANT: All new business, renewals and MTA’s for policies that incept or renew before 1st November 2015 should be notified to RSA in good time to allow RSA to process before 29th February 2016 on the existing IPT rate. Late notification may result in RSA not being able to process before 29th February 2016 and so become liable for the new IPT rate and paying the potential IPT shortfall. In these circumstances RSA will hold the broker or intermediary responsible for paying the IPT shortfall if notification is outside the agreed contractual timescales.
Q2) How is IPT applied to premiums?
The insurers accounting scheme determines the tax point for IPT and so the rate of tax applicable. RSA work to the Special Accounting Scheme and as such the tax point is when the premium is processed on RSA systems.
New business & renewals
Policies incepting or renewingon or after 1st November 2015, where the premium is processed on a RSA system on or after 1st November 2015, are subject to the 9.5% new rate of IPT.
Policies incepting or renewing prior to the 1st November 2015, where the premium is processed on a RSA system up to and including 29th February 2016 are subject to the 6% old rate of IPT.
Additional premium
The rate of IPT paid is based on the effective date of the MTA and the process date. Additionally, for the transitional period from 1st November 2015 to 29th February 2016, we must also consider the inception/renewal date.
For a policy that incepts or renews before 1st November 2015, an additional premiumprocessed on a RSA system up to and including 29th February 2016, will be subject to the 6% old rate of IPT, due to the transitional period.
An additional premium for a policy that incepts or renews on or after 1st November will be subject to the 9.5% new rate of IPT.
All additional premiums processed on a RSA system on or after 1st March 2016 will be subject to the 9.5% new rate of IPT, irrespective of the inception or renewal date.
Example: Policy incepts on a RSA system 1st October 2015 @ 6% IPT,
- an additional premium MTA is processed on a RSA system 22nd February 2016 @ 6% IPT, as this is within the transitional period.
- another additional premium MTA is processed on a RSA system 1st April 2016 @ 9.5% IPT.
Where RSA has agreed to a Minimum and Deposit premium at renewal or inception, and an additional amount is due on adjustment at the end of the period, then the adjustment will be at the new IPT rate if due and/or is processed on a RSA systems on or after 1st March 2016. If the adjustment results in a return premium, please see below.
Return premium
Return premium, refunds or cancellations, will be subject to the rate of tax charged on the initial premium that is being adjusted.
For example,
- A return premium processed on a RSA system on or after the 1st November, where the policy incepted or renewed before the 1st November 2015 will be subject to the old 6% rate of IPT.
- Otherwise it will be subject to the new 9.5% rate of IPT, if the policy incepted on or after the 1st November 2015.
Q3) How should Third Parties apply IPT when there is a delay in processing to a RSA system?
Third Parties should treat the customer fairly and therefore charge the IPT expected by the customer based on the inception or renewal date, or the effective date of the MTA.
IMPORTANT: All new business, renewals and MTA’s for policies that incept or renew before 1st November 2015 should be notified to RSA in good time to allow RSA to process before 29th February 2016 on the existing IPT rate. Late notification may result in RSA not being able to process before 29th February 2016 and so become liable for the new IPT rate and paying the potential IPT shortfall. In these circumstances RSA will hold the broker or intermediary responsible for paying the IPT shortfall if notification is outside the agreed contractual timescales.
Q4) Is IPT guaranteed within a quote guarantee period?
Quotes produced prior to the 1st November 2015 with an inception, renewal or MTA effective date before 1st November 2015 should be quoted at the old 6% rate of IPT.
Quotes produced prior to the 1st November 2015 with an inception, renewal or MTA effective date on or after 1st November 2015 should on quoted at the new 9.5% rate of IPT.
Quotes produced prior to the 1st November 2015 with an expected inception date before 1st November 2015 that were quoted at the old 6% rate of IPT but are finally accepted with an inception date on or after 1st November 2015 are subject to the new 9.5% rate of IPT.
Q5) How will a request for a change in renewal date be considered?
A request for early cancellation of an existing policy to take out a new policy that incepts prior to 1st November may be considered on an individual basis. This is not caught by the HMRC anti-forestalling provisions.
Q6) How will premium instalments be handled?
Annual contract policies incepting/renewing prior to 1st November 2015 where the premium is booked in full at inception/renewal or on a RSA system before the 29th February 2016 will be subject to the 6% rate of IPT. The instalments that are then paid under a credit agreement, for example, do not impact on the IPT.
Example 1: Contract of Insurance renews 21st October 2015 and 100% premium agreed and processed on a RSA systems prior to 29th February 2016 at 6% IPT. It is agreed that 4 equal instalments are paid quarterly. The instalment arrangement will not affect the IPT that has already been processed @ 6%.
If separate premium instalments are processed throughout the year (rather than 100% premium processed in one amount) then each instalment processed will have a separate tax point with IPT charged at the prevailing rate.
Example 2: A policy renews 21st July 2015 with 4 individual instalments agreed for 21st of October 2015, 21st January 2016, 21st April 2016 and 21st July 2016.
- The first instalment is processed on 21st July will be subject to 6% IPT as this is prior to the rate change on 1st November 2015.
- The second instalment is processed on 21st January 2016 will be subject to 6% IPT as this is within the transitional period and the policy renewed prior to 1st November 2015.
- The other two instalments will be processed after the transitional period closes on 29th February 2016 and so will be subject to 9.5% IPT.
Q7) If the Insured wishes to pay their premium in advance, will this influence the prevailing IPT rate?
The date that the premium is paid will not influence the prevailing IPT rate due to RSA being on the Special Accounting Scheme. The IPT rate will be based on the inception, renewal or MTA effective date (see Q2 above).
Q8) For a Global account, what UK IPT rate will apply if a policy incepts prior to the 1st November 2015 , and the instructions are given to RSA to bind, but the allocation of the premium between the territories are agreed after the 1st November 2015?
RSA will need to process an agreed territorial premium for the UK prior to 29th February 2016, to ensure 6% IPT is applied.
RSA and their supporting brokers are aware of the need to agree an allocation in good time to meet the revised tax regime implemented by HMRC. This is helped due to the transitional period as it gives some time to sort out these type issues and get the premium processed at the appropriate rate of IPT.
Q9) How will IPT be processed when premiums are notified to RSA via a Bordereaux?
Third parties should make the necessary changes to their systems in line with HMRC rules. Premium should be documented and processed via Bordereaux as standard; we ask that the following points are noted:
- All bordereaux will need to be submitted at transactional level
- Effective date will need to be clear
- IPT rate clearly shown and split between the two rates either by separate worksheet or filter.
- All bordereaux must be submitted by the due date and within the agreed periods of notification
Bordereaux should be sent to RSA within the agreed contractual timescales. If Bordereaux are received within the contractual timescales then RSA will honour the premium agreed with the Customer and pay any IPT shortfall between the IPT rate collected from customers and the IPT rate liable to RSA. The impact of this should be minimal due to the transitional period.
Where possible, RSA would appreciate early receipt of any Bordereaux so we can process premiums before 1st March 2016 and align IPT with the amount collected from customer.
Q10) Are Software Houses making the necessary IPT changes?
All software houses have been provided with updated schemes and rules that incorporate the new IPT rates. Software houses will distribute the updates with the associated tax rules within normal monthly updates.
RSA accept that there may be some processing delays and therefore an IPT shortfall due to the lead to process EDI messages.
Q11) How will Freedom of Services Contracts be impacted?
The IPT provisions apply equally to offices situated outside UK, writing contracts on an FOS basis where part of the risk is situated in UK.
Q12) What is the position on Co-insurance contacts where RSA Lead/Follow?
Regardless of Lead or Follow status, the prevailing tax position will follow the rules as detailed above. Each co-insurer is responsible for the accurate collection and payment of IPT to HMRC on their share of the premium.
Consequently, there will be a need to be clear guidance on the latest date on which allocations can be agreed to satisfy all Panel Insurers.
Q13) What is the Position on Reinsurance contracts?
IPT does not apply to reinsurance contracts.
Q14) What rate of IPT is applied to long-term deals?
A contract that determines how future annual premiums will be calculated but maintains individual annual tax points for IPT will be charged at the prevailing rate due for each separate annual period of Insurance.
Example: A 3-year policy is agreed 1st October 2015,
- Period 1 - the 1st period is incepted and processed prior to 1st November 2015 at 6% IPT
- Period 2 - has an effective date of 1st October 2016, therefore 9.5% IPT, or prevailing rate if different, will apply.
- Period 3 - has an effective date of 1st October 2017, therefore 9.5% IPT, or prevailing rate if different, will apply.
Q15) What rate of IPT is applied for a long-term contract?
Provided the contract is of a type where it is normal company and industry practice for it to be issued for period longer than a year, the prevailing rate of IPT will be determined by the normal rules, see Q2 above.
Example: a Construction project cover written for 3 years from 1st October 2015 where 100% of the premium and IPT is processed prior to 29th February 2016 will be subject to 6% IPT.
Q16) What if a customer requests an extension to their current policy?
If a customer requests an extension to their current policy that incepted or renewed prior to 1st November 2015, care must be taken to ensure compliance with the HMRC anti-forestalling provisions.
If you receive a request to extend a policy that incepted prior to 1st November 2015, and you write the premium in the transitional period, then any additional premium called for in relation to that extension may be treated as subject to the old 6% rate of IPT unless the:
- premium is in respect of a risk which would normally be covered by a new contract
- anti-forestalling provisions apply
For example,
- If a policy is extended to bring the period of cover into line with a client’s other insurance policies, and the additional premium is written before 29th February 2016, then that premium will be subject to the old 6% rate of IPT.
- If, however, the extension has been made to avoid IPT at the new rate and the risk would normally be covered by a new contract, the additional premium is subject to the new 9.5% rate of IPT.
Anti-Forestalling provision
Where:
- insurance contracts are taken out or renewed between the announcement date (8th July 2015) and the implementation date (1st November 2015) of a rate change, and
- extended periods of cover are provided under those contracts, and
- that cover commences before the implementation date of the rate change
The premium must be apportioned between that relating to cover up to the first anniversary of the implementation date (1st November 2016) and that relating to the remainder of the policy, with tax at the new rate on the latter portion becoming due on the date of the rate change.
Example,
Policy incepting on 1st October 2015 covering an extended period of 18 months to 31st March 2017 –
- The portion of premium for the cover to 31st October 2016 is subject to the old 6% rate of IPT,
- The portion of premium for the cover from 1st November 2016 until 31st March 2017 is subject to the new 9.5% rate of IPT.
The anti-forestalling provisions do not apply to contracts that fall into the category of long term contracts covered in Q15 above.