HMRC targets insurance premium tax avoidance

HMRC is consulting on the operation of insurance premium tax (IPT) in a bid to stop artificial manipulation of fees and commission to avoid the tax and is considering anti-avoidance measures

The changing face of the insurance industry is one of the reasons the review has been called. When the tax was first introduced 25 years ago, the majority of insurance was bought through an insurance broker or direct with insurers, but now there is a shift from commission-based to fee-based broker remuneration, as well as the shift to online sales via third party sites.

There are currently two rates of IPT, the higher rate is 20% for insurance supplied with selected goods and services and payable on contracts entered into by insurers, while the standard rate is 12% for individuals, charged on premiums for anything from household to car and travel insurance.

HMRC is also considering changing the IPT registration requirements for insurance groups with overseas members, potentially removing the requirement to have a UK resident director.

It is also looking at captive insurers, which are owned and controlled by their parent entity, and is gauging reaction on whether to require captives to declare their parent compay. HMRC sees these as a vehicle for tax avoidance, stating that ‘captives are commonly located in overseas tax jurisdictions which can lack transparency. The effectiveness of HMRC’s statutory information powers is therefore limited in these instances’.  

Another area where HMRC has flagged potential abuses and tax avoidance is over the split between fees and commission, as well as a lack of transparency on the IPT return, which it would like to be more detailed so the tax authority can understand the scale and scope of insurance written by insurers, which is exempt from IPT. In line with HMRC’s desire to gain as much insight into tax behaviour, it said ‘this would allow HMRC to better match compliance activity to risk, enabling the reduction of burdens on lower risk taxpayers’.

The commission and fee structure is another red flag for HMRC.

In the consultation, HMRC stated: ‘We have been made aware of business practices involving administration and arrangement fees which may be leading to unfair tax outcomes in the insurance industry. This involves the artificial manipulation of insurance and broker structures to create different tax outcomes. IPT is chargeable on the gross premiums, whereas fees are not subject to IPT or VAT.’

HMRC is now considering a number of options to crack down on identified avoidance and evasion, including bringing certain administration fees into the scope of IPT where corporate structures are used to artificially manipulate the level of commission and fees received.

This would involve an anti-avoidance measure which would target those using contrived pricing structures to gain a competitive tax advantage.

The consultation also stated: ‘If there has been a shift in the industry from commission to fees, whether for transparency or otherwise, bringing fees within the scope of IPT would ensure the tax is applied fairly across the insurance sector.’

The government is undertaking this call for evidence to understand more about how the administration and collection of IPT can be modernised and to address any unfair tax outcomes. It will not look at the rates charged for the tax which was originally introduced in 1994 and is now a significant, unavoidable tax on all insurance premiums for consumers and business.

The closing date for the consultation is 17 July 2019.

Consultation - Call for evidence: the operation of Insurance Premium Tax, issued 3 June 2019

By Sara White


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