The insurance premium tax is a tax imposed in the UK on premiums received under a taxable insurance contract. An insurance premium is defined for the purpose of the insurance premium tax as all payments received by the insurer under the insurance contract.
Where an insurer receives premiums that relate to taxable insurance contracts, that insurer is engaging in a taxable business for the purposes of the insurance premium tax, whether or not the insurer is a company licensed by the UK Financial Services Authority to do business. Even if the insurer is not a limited company, or does not have an establishment in the UK, it may be regarded as carrying on an insurance business and be liable to register for insurance premium tax.
An insurance contract is a legally enforceable contract clearly identifying what is insured. Under an insurance contract the insured pays a premium in return for which the insurer indemnifies against loss, compensates for damage or provides some corresponding benefit. The insured party must have an insurable interest in the subject matter of the insurance. The premium charged by the insurer will generally be related to the claims that the insurer expects to meet from the pool of premiums collected.
The insurer requires the insured party to disclose all material facts before signing the contract, otherwise the contract can be declared void. If the contract is breached by the insured party, it can be declared void from the date of breach. In the absence of a breach of contract, the insured person has an absolute right to payment under the insurance contract.
If the insurer enters into a contract which is not a contract of insurance, insurance premium tax does not apply. A contract of guarantee, whereby the guarantor is responsible for a third party paying its debts to a creditor, cannot be a contract of insurance. A contract of guarantee is therefore not liable to insurance premium tax.
Financial instruments such as contracts for difference, swaps and futures are often used for hedging and managing risk, and therefore have some points in common with insurance contracts. However, these are different to contracts for insurance because they provide the possibility for profit or loss. Also, it is not necessary for the person buying the financial instrument to have an insurable interest and the buyer does not have to make full disclosure of material information to the seller. These conditions would apply to an insurance contract, so financial instruments are not insurance contracts and are not subject to insurance premium tax.
Exempt insurance contracts
All types of insurance risk located in the UK are taxable unless they are specifically exempted by the legislation. The exemptions from insurance premium tax include the following types of contract:
Re-insurance; Life insurance, permanent health insurance, and all other “long-term” insurance except medical insurance; Export finance; Commercial goods in international transit; and Risks located outside the UK.
Also, a contract for insurance of a commercial ship or a commercial aircraft relating to insurance against accident, hull and third party risks is exempt.
Where an insurance contract relates to both taxable and exempt risks, the premiums paid must be apportioned for the purpose of calculating the insurance premium tax payable. The insurer is responsible for making sure that this is done in a reasonable way.
Rates of insurance premium tax
The standard rate of insurance premium tax, which applies to premiums paid on most taxable insurance contracts, is 5%. From January 2011 the rate will rise to 6%.
The higher rate of insurance premium tax is 17.5%, rising to 20% from January 2011. The higher rate applies to insurance sales in the following sectors, where insurance contracts are concluded in relation to goods and services subject to VAT:
Sales of motor cars, light vans, or motor cycles; Sales of electrical or mechanical domestic appliances; Sales of travel insurance.
All travel insurance is subject to the higher rate of insurance premium tax, but in the other sectors mentioned above the higher rate applies only when the insurance is sold by or through the person who is also supplying those goods.
Registering for insurance premium tax
Anyone receiving taxable insurance premiums as an insurer, or intending to do so, must register for insurance premium tax. Also, anyone who charges an insured person an insurance-related fee in connection with a higher-rated contract (known as a taxable intermediary) must also register for insurance premium tax. Where premiums are only being received for exempt insurance contracts, there is no need to register.
The taxpayer should notify HMRC within 30 days of receiving the first taxable premium or intending to do so. Registration is done by completing Form IPT 1 “Application for registration”. A return should be completed every three months and payment of insurance premium tax made with the return.
Sources:
HMRC website www.hmrc.gov.uk
Deloitte budget website www.ukbudget.com