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What insurers need to know about IPT two years on from Brexit

iStock 1198219146 - Global Banking | Finance

421 - Global Banking | FinanceBy Russell Brown, Senior IPT Consulting Manager at Sovos

The UK’s decision to leave the European Union (EU) came into force over two years ago, however, we still face much uncertainty due to a number of factors. Although the UK has in theory taken back control of its tax future, many social and economic issues remain and have appeared as major roadblocks. Insurance Premium Tax (IPT) is a perfect example of precisely this.

Insurers operating in the UK will typically know that IPT has sat stagnant for several years and was not part of the UK’s flagship tax digitalisation initiative, Making Tax Digital (MTD). Meanwhile other jurisdictions abroad have continued to evolve their own tax legislation, varying from country to country. Keeping up with these changes can be a headache as significant repercussions are on the line if companies fail to comply.

Digitalisation for IPT could very well be on the horizon in the UK as the large initial wake of Brexit and other global issues subside. So, let’s take a look at what challenges and changes lay ahead for insurers operating in the UK.

Clarity on IPT required

A lot of uncertainty was created in the aftermath of the Brexit vote and it’s no different for insurers, with doubt as to whether UK insurers could insure risks located in EU member states. Simultaneously, EU-based firms will have the same issue insuring risks in the UK.

What’s more, de-regulation is a particular area that insurers are severely lacking clarity on. Companies that have merged with an EU-based insurer will need to close old tax registrations for the UK entity that were established before the UK’s withdrawal on a Freedom of Services (FOS) basis. De-registering may be the best option, but they would need to inform respective tax authorities of old registrations for UK based entities.

It’s also important for UK-based insurance firms to understand the impact of de-registrations on claims and their passporting licence. Tax registrations could be continued until ongoing claims are settled, however, in jurisdictions like Portugal, Spain, and Germany, insurers will still be required to maintain compliance with each regulator or they risk their license being withdrawn.

Resolving historical IPT claims

Today, there are several differences in IPT compliance from country-to-country in the EU. The UK’s exit from the EU meant that UK insurers can no longer operate freely in the EU under the FOS basis. In turn, there’s more muddied water around how insurers should declare historic IPT obligations before the 31st of January 2020. What’s more is that these can vary from country to country – for example, past liabilities can be submitted through supplementary declarations  in the Netherlands, as well as other countries such as Finland, Luxembourg, and Germany, who have similar procedures.

However, UK insurers will face greater difficulty to identify what liabilities they have if they aren’t already registered, or if they have already gone ahead and deregistered. Slovakia has recognised these issues and their tax authority has allowed UK insurers to appoint a local representative to settle these amounts without the UK insurer being registered.

Nevertheless, UK insurers will have to identify their own historical liabilities in the EU and the best approach is to stay registered until all open liabilities have been settled. Only then would we advise moving forward with deregistration. However, in countries such as Spain and Portugal, two years on from Brexit, they have started  to deregister UK based entities with ongoing licenses.

With so many variables in each country, having a third-party representative that can advise on identifying and settling these outstanding liabilities is worthwhile.

What does the future hold?

Changes to IPT are far and few between, however any changes would mean a great deal of administrative work. Much of this burden ultimately falls on brokers who must accurately determine premium taxes and parafiscal charges for their policies.

Staying ahead of these changes is vital as not only can rates change but entire reporting processes. For example, the UK now requires quarterly IPT returns to be submitted, but this may be replaced by an annual IPT return, with quarterly payments on account for insurers that pay more than a specific sum of IPT annually. Additionally, reporting requirements may increase and the level of data that needs to be submitted would demand entire internal processes to be overhauled.

Following Brexit, insurers have become increasingly cautious with policies offered in the EU, such as travel insurance. Any changes to IPT in EU member states could drastically affect their compliance in both jurisdictions and ultimately impact the level of service that they’re able to provide their customers.

Other insurance products such as those considered to be lifestyle choices including income protection and permanent health insurance of at least five years are exempt from IPT, although they may become subject to VAT with governments looking to recoup the economic investments made to stabilise their economies during the pandemic. In the event of such changes, insurers will have to rely on brokers to determine whether their customer is a UK registered business or a private individual. Brokers too will be responsible for taxes to be paid and the records to be accurate before passing these onto the insurers.

The UK’s exit from the EU has freed them to determine their own future regarding IPT – whether they decide to alter the current 12% standard rate of IPT or completely remove it all together. It’s possible that the UK will decide to go ahead with the latter option and apply VAT to insurance policies instead with a rate of 20% which would increase the tax received by 8%.  However, such a move would be very unpopular among the UK public and could be perceived as a stealth tax that has been paid for through higher insurance premiums.

An alternative option would be to have a lower VAT rate of 12% for compulsory insurance for private individuals, such as home and motor insurance. This would mean that the government could not be accused of pricing poorer parts of society from taking out policies such as home contents insurance, which could be especially important particularly if they’re living in areas subject to flooding. With this approach, the government would still be permitted to charge 20% on other forms of insurance with no social aspects, such as directors’ and officers’ liability (D&O) insurance. VAT registered businesses may be more willing to accept VAT instead of IPT being charged on their premiums because they can then recover the tax as input VAT, which they cannot do with IPT as this is an irrecoverable cost for all consumers.

As time goes on, we will hopefully see the uncertainty surrounding IPT dissipate and tax authorities both in the UK and EU provide a steady and clear regulatory framework for IPT. However, with changes ongoing and much uncertainty still remaining, insurers can’t sit around to see what happens. The only way they can truly prepare for any changes that lie ahead is transforming their internal processes to adapt to any modifications and use the expertise of their partners that can advise on other jurisdictions.

Global Banking & Finance Review


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