Insurance Premum Tax increase to impact de minimis provisions

Insurers are liable if the wrong tax is collected so it’s vital to make sure you get it right first time

Current UK de minimis – an import value below which duties and/or taxes are waived –provisions for UK Insurance Premium Tax (IPT) might become more attractive for insurers to utilise following the increase from 10% to 12% on 1 June 2017, according to specialist tax consultancy FiscalReps.
The rules which were designed to reduce the administrative burden on insurers writing contracts with only a small element of UK taxable risks have not historically been used very often by insurers as the cost and effort required to actually administer the scheme tended to outweigh the benefits and savings, claims the firm.  
FiscalReps says the whole life of the contract needs to be considered and if at any time the conditions are not met, IPT will need to be accounted for retrospectively.  Continually monitoring changes in a contract, such as mid term adjustments, return premiums and additional premiums, has been considered by many to be too arduous and risky. 
However, as the UK IPT rate continues to increase, the firm says the potential IPT saving under the de minimis provisions also increases meaning insurers may wish to reconsider their position on the use of the provisions. 
The rules state that if less than 10% of the contract relates to the UK taxable risks, and the total premium due under the contract is less than £500k, then it does not need to be included in a UK tax return. Before November 2015 this meant a total saving for this type of contract of up to £3k. With the IPT rate now reaching 12% however, the saving could be as high as £6k.
FiscalReps says HMRC has responded favourably to industry feedback regarding anti-forestalling provisions surrounding the 1 June rise, making a number of changes and updates to the provisions that had been used on previous rate changes. The provisions apply to three types of transaction:
·         Premiums received prior to risk incepting (advanced payments)
·         Premium received for contracts longer than 1 year (extended cover)
·         Premiums relating to risks incepting at different times (more than one period of cover)
There is also a final backstop in place covering all premiums received on or after the first anniversary of the change date (1 June 2018) which will be subject to the new rate irrespective of the risk inception date.
FiscalReps CEO Mike Stalley said: “Tax is all about politics – governments need to raise money to be able to spend money.  The doubling of the IPT rate over the last two years has many knock on effects, including what is covered by the de minimis provisions.
“It should never be forgotten that it is the insurers who are liable if the wrong tax is collected, and at a time when premiums and costs are under pressure, it is vital to make sure that you get it right first time.”