IMPORTANT NEWS
Insurance Premium Tax (IPT) increasing from 10% to 12%
From the 1st June 2017 the standard rate of Insurance Premium Tax (IPT) was increased from 10% to 12%. There is no change to the higher rate of IPT of 20%. The following IPT rules apply:
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All new policies and renewals that start on or after 1st June 2017 will be charged at the new IPT rate of 12%. Any mid-term adjustments to these policies that generate an additional premium will also be charged at the new IPT rate of 12%.
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For policies that incepted before the 1st June - MTAs with an additional premium on policies that incepted or renewed prior to 1st June 2017 will be charged at the old, 10%, rate of IPT
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There is a backstop date of 1st June 2018 at which point IPT will be 12% for all new and additional premiums
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All mid-term adjustments that generate a return premium will usually be refunded at the IPT charged at the policy start date.
If you require any further information, please do not hesitate to contact your RSA Relationship Manager.
Here are some Frequently Asked Questions around the increase.
Q1) What is the backstop date?
Unlike the previous two IPT rate rises, there is no transitional period for insurers operating the Special Accounting Scheme (like RSA). Instead HMRC have introduced a backstop date of 1st June 2018.
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 new business and renewal premiums written in RSA systems on or after 1st June 2017 would be subject to the new rate of IPT.
However, the backstop date allows insurers to write premiums for policies that have incepted or renewed prior to 1st June 2017 at the old rate provided these premiums are processed in RSA systems before 1st June 2018. 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 premium transactions dated before 1st June 2017 should be notified to RSA in good time to allow RSA to process before 1st June 2018 on the existing IPT rate. Late notification may result in RSA not being able to process before 1st June 2018 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 renewing on or after 1st June 2017 where the premium is processed on an RSA system on or after 1st June 2017 are subject to the 12% new rate of IPT.
Policies incepting or renewing prior to 1st June 2017 where the premium is processed on an RSA system up to and including 31st May 2018 are subject to the 10% 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, we must also consider the inception/renewal date.
For a policy that incepts or renews before 1st June 2017, an additional premium processed on an RSA system up to and including 31st May 2018, will be subject to the 10% old rate of IPT.
An additional premium for a policy that incepts or renews on or after 1st June 2017 will be subject to the 12% new rate of IPT.
All additional premiums processed on an RSA system on or after 1st June 2018 will be subject to the 12% new rate of IPT, irrespective of the inception or renewal date.
Where RSA has agreed to a Minimum and/or Deposit premium at renewal or inception before the 1st June 2017, and an additional amount is due on adjustment at the end of the period, then the adjustment will be at the old IPT rate if due before 1st June 2018.
Return premium
Return premium, refunds or cancellations, will always be subject to the rate of tax originally charged on the premium that is being adjusted.
Example: A return premium processed on a RSA system on or after the 1st June 2017, where the policy incepted or renewed before the 1st June 2017 will be subject to the old 10% rate of IPT.
Q3) How should Third Parties apply IPT when there is a delay in processing to an 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.
IMPORTANT: All new business, renewals and MTAs for policies that incept or renew before 1st June 2017 should be notified to RSA in good time to allow RSA to process before 1st June 2018 on the 10% IPT rate. Late notification may result in RSA not being able to process before 1st June 2018 and so become liable for the new 12% 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 June 2017 with an expected inception date before 1st June 2017 that were quoted at the old 10% rate of IPT but are finally accepted with an inception date on or after 1st June 2017 are subject to the new 12% rate of IPT.
Quotes produced prior to the 1st June 2017 with an inception, renewal or MTA effective date on or after 1st June 2017 should on quoted at the new 12% rate of IPT.
Quotes produced prior to the 1st June 2017 with an expected inception date before 1st June 2017 that were quoted at the old 10% rate of IPT but are finally accepted with an inception date on or after 1st June 2017 are subject to the new 12% 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 June 2017 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 June 2017 where the premium is booked in full at inception or renewal on a RSA system before the 1st June 2018 will be subject to the 10% 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 May 2017 and 100% premium agreed and processed on RSA systems prior to 1st June 2018 at 10% IPT. It is agreed that 4 equal instalments are paid quarterly. The instalment arrangement will not affect the IPT that has already been processed @ 10%.
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. Where the policy incepted or renewed before the 1st June 2017 and premium instalments are processed on or after the 1st June 2017 but before the 1st June 2018, the instalments will be subject to the old 10% rate of IPT.
Example 2: A policy renews 21st May 2017 with 4 individual instalments agreed for 31st May 2017, 31st October 2017, 31st March 2018 and 31st July 2018.
The first instalment is processed on 31st May 2017 and will be subject to 10% IPT.
The second and third instalments are processed before the 1st June 2018 and will also be subject to 10% IPT. This is because the policy renewed before 1st June 2017 and the instalments are processed before 1st June 2018.
The last instalment is processed after 1st June 2018 so will be subject to 12% 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 June 2017 , and the instructions are given to RSA to bind, but the allocation of the premium between the territories are agreed after the 1st June 2017?
RSA will need to process an agreed territorial premium for the UK prior to 1st June 2018, to ensure 10% 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:
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All bordereaux will need to be submitted at transactional level
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Effective date will need to be clear
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IPT rate clearly shown and split between the two rates either by separate worksheet or filter.
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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 backstop period.
Where possible, RSA would appreciate early receipt of any Bordereaux so we can process premiums as soon as possible and align IPT with the amount collected from customer.
Q10) Are Software Houses making the necessary IPT changes?
All software houses will be 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 May 2017,
Period 1 - the 1st period is incepted and processed prior to 1st June 2017 at 10% IPT
Period 2 - has an effective date of 1st May 2018, therefore 12% IPT, or prevailing rate if different, will apply.
Period 3 - has an effective date of 1st May 2019, therefore 12% 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 May 2017 where 100% of the premium and IPT is processed prior to 31st June 2018 will be subject to 10% 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 June 2017, 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 June 2017 and you write the premium before 1st June 2018 then any additional premium called for in relation to that extension will be subject to the old 10% 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 1st June 2018, then that premium will be subject to the old 10% rate of IPT.
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 on or after 1st June 2018, then that premium will be subject to the new 12% rate of IPT.
Anti-Forestalling provision
Where:
insurance contracts are taken out or renewed between the announcement date (23rd November 2016) and the implementation date (1st June 2017) 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 June 2018) 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 May 2017 covering an extended period of 18 months to 31st October 2018 –
The portion of premium for the cover to 31st May 2018 is subject to the old 10% rate of IPT,
The portion of premium for the cover from 1st June 2018 until 31st October 2018 is subject to the new 12% 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.
Q17) What is the new apportionment rule?
Where a premium is processed on or after 1st June 2017 for a policy which covers different risks and for some risks the cover begins before 1st June 2017 and for other risk on or after 1st June 2017, the premium has to be apportioned between those risks. The amount of premium that relates to the cover beginning on or after 1st June 2017 will be subject to the new 12% rate of IPT.