Insurance premium tax (IPT) is charged on taxable insurance premiums received on or after 1 October 1994 which cover risks located in the UK. The tax is under the care and management of the Commissioners of HM Revenue and Customs.
IPT is due on the chargeable amount which is the amount which, with the addition of the tax, equals the premium due under the contract of insurance. So if, for example, the premium due under the insurance contract is £105 and the tax is £5, the chargeable amount is £100.
The premium due under the contract of insurance includes any payment for—
The change from 22 March 2007 was introduced by Finance Act 2007 to stop specific perceived avoidance. This is aimed at where, for example, a larger contract for construction, would include a right to require an insurer to provide insurance. It is narrowly targeted.
Generally the amount charged to the insured is treated as the premium unless the payment—
The premium may consist wholly or partly of something other than money but tax is due on the open market value of what is received plus any payment made in the form of money. The “open market” value is an amount equal to the consideration in money which an unrelated person would pay.
If the premium is received by another person, such as an intermediary, broker or administrator, on behalf of the insurer, the insurer is treated as having received the premium when that other person receives it.
This provision does not apply where the premium is deducted by, or on behalf of, an employer from any remuneration or other payments due under the employee's contract of employment.
When the tax was introduced there was only one rate of tax of 2.5 per cent (subsequently increased to 4 per cent, then 5 per cent and now 6 per cent). In 1997 a higher rate of 17.5 per cent was introduced (subsequently increased to 20 per cent). The rates in force from time to time have been as follows—
|Period in force||Rate||Authority|
|Standard rate||01/10/1994–31/03/1997||2.5%||FA 1994 s 51|
|01/04/1997–30/06/1999||4%||FA 1997 s 21(1)|
|01/07/1999–03/01/2011||5%||FA 1999 s 125(1)|
|04/01/2011-current||6%||F(No 2)A 2010 s 4(1)|
|Higher rate||01/04/1997–03/01/2011||17.5%||FA 1997 s 21(1)|
|04/01/2011-current||20%||F(No 2)A 2010 s 4(1)|
The higher rate of 17.5 per cent was introduced with effect from 1 April 1997 (increased to 20 per cent from 4 January 2011) to address perceived value shifting, where insurance is sold with goods and services liable to VAT at the standard rate. It was argued by HMRC that suppliers in certain sectors were reducing the cost of goods and services subject to VAT at 17.5 per cent with a corresponding increase in the insurance premium, which was subject to the standard rate of IPT.
The higher rate was initially applied to certain premiums for insurance contracts relating to the following—
With effect from 1 August 1998 the higher rate was extended to all travel insurance.
When the rate of tax changes, the new rate applies to premiums received on or after the date of the rate change.
FA 1994 ss 67A–67C, which were inserted by FA 1997 s 29(1), contain provisions to prevent an attempt to avoid a new rate of tax by forestalling through pre-payment or an extension of the term of the contract.
If an increase in the rate of tax from a specified date is announced and—
If an insurance contract—
then the proportion of the premium providing cover after the first anniversary of the date of the change of rate shall be taken to be a separate premium received on the date of the rate change and therefore subject to the increased rate of tax. The proportion of the premium providing cover to the first anniversary of the change of rate is subject to the previous rate of tax. If the insurer is using the special accounting scheme the accounting entry showing the premium as due is deemed to be made on the date of the change of rate. The apportionment of the premium for these purposes shall be made on a basis as is just and reasonable.
These provisions also apply to insurers using the special accounting scheme who receive advance payments of premiums or write insurance contracts giving extended cover during the concessionary period unless it is their normal practice to do this.
These rules do not apply to insurance contracts where it is the normal practice for cover to be provided for a period exceeding twelve months. Examples of such contracts are single premium credit insurance, credit gap shortfall insurance, some mechanical breakdown insurance, building latent defects policies and mortgage indemnity insurance.
If an advance payment for a premium for an insurance contract providing cover from a date after the date of the rate change is received between the date of the announcement of a rate change and the date of the rate change the premium is deemed to be received by the insurer on the date of the change and therefore subject to the new rate of tax. These rules do not apply though if it is the normal practice of the insurer to receive premiums for that type of insurance contract before the date when cover begins.