Uncertainty seems to be a hallmark of today’s world. More than two years ago, Brexit officially came into effect, but its economic and social consequences are still unfolding. Although the UK has taken back the reins of its own tax future, insurers still face many issues and concerns regarding Insurance Premium Tax, or IPT. The vote to leave the EU raised many questions for the industry at the time, and they are still very much with us today.
Full digitization of IPT is a likely destination on the horizon. Insurers and brokers will have to share transaction data much more frequently with the government. Moreover, as legislation develops in different jurisdictions, knowing which rules apply in different countries will be burdensome and the potential consequences of getting it wrong will be severe.
In this article, we look at some of the main challenges and changes that UK insurers may face in the coming years in the long term post-Brexit.
As a result of the Brexit vote, there was great uncertainty about whether UK insurers would be able to insure risks located in the other 27 EU member states, and whether EU insurers would be able to insure UK risks. In order to reassure their customers, insurers must take the necessary steps to strengthen and sustain their business.
One area that lacks clarity is deregistrations. If a company has merged with an EU-based insurer, it is important that it closes its old tax registrations for the UK-based entity that were written on a freedom of services basis before Brexit and notifies the relevant authorities of the change in the operating model. This, in turn, will leave the resulting entity responsible for paying and complying with taxes. Deregistration of these EU registrations is likely to be the best option for UK-based insurers who do not cease operations but continue to operate in the UK and outside Europe. This will help streamline remaining registrations and any other reporting requirements from a company perspective.
It is also important to consider the impact of UK company deregistrations on claims and the associated passporting licence. Tax registrations can be maintained until accounts are reconciled and closed. In such cases, however, some countries such as Germany, Portugal and Spain, where the license is still active by the regulator, require tax compliance to be maintained until the license is revoked.
As is now common knowledge, UK insurers can no longer do business in the EU on a freedom of services basis as the Brexit deal does not include relevant financial services provisions. With this in mind, another potential area of uncertainty for many UK insurers is how to declare and settle the historical IPT liabilities incurred by their UK entities before Brexit takes effect on 31 January 2020.
How do UK insurers file historical IPT in the EU? This varies from country to country, as do most compliance topics related to it. In general, the EU authorities understand that at this stage there may still be obligations recorded on the basis of freedom of services, and that there should therefore be some way of facilitating the declaration of such obligations. Historical liabilities in the Netherlands, for example, can be disclosed through additional declarations. Similar processes can be initiated in Germany, Finland and Luxembourg.
UK businesses may find it difficult to identify historical liabilities if they were not originally registered or have already been deregistered from the country in which they established those liabilities. For example, UK companies wishing to declare their IPT in Slovakia cannot register in the country. However, if only historical liabilities are required to be declared, the Slovak tax authority has confirmed that insurers can appoint a representative to settle these amounts without formal IPT registration having been completed.
Although the following advice may conflict with the deregistration guidance given above, we recommend that, as a general rule, if a UK insurer expects that it will have historical liabilities in an EU jurisdiction, it should remain registered there until completion of the final accounts and all unreported liabilities are uncovered and fully declared. Once this is complete, the deregistration process can be carried out if required. Now, more than two years after Brexit came into force, there has been some movement by some countries, for example Portugal and Spain, to automatically de-register UK entities with active licenses in those jurisdictions.
Finding a representative who can advise you on how to declare and proceed with historical IPT liabilities based, where possible, on relevant country legislation and guidance is highly recommended.
If changes are indeed made to the IPT, the insurance sector will have to deal with an increased amount of administrative work. Today, the burden of ensuring that premium taxes and parafiscal charges are correctly calculated on policies falls primarily on brokers. Therefore, broker consent will be required before administrative changes are implemented. Not only are IPT rates subject to change, but so is the entire reporting process.
For example, in the UK there is currently a requirement to submit a quarterly IPT return, but this could be replaced by an annual IPT return, with quarterly payments on account for insurers who pay more than a certain amount of IPT per year. There may also be changes to the data provided on return. In other words, insurers will have to spend much more time fulfilling the reporting requirements.
The changes to IPT will also affect every insurance choice offered in the EU, including travel insurance. Since Brexit, brokers have taken much greater care to maintain full compliance in both jurisdictions. This could negatively impact the level of service they provide compared to before the UK left the EU, as in some cases brokers have had to split policies and transfer them to other European businesses.
Products that are considered lifestyle choices and are exempt from IPT, such as income protection and permanent health insurance for at least five years, as well as other life and long-term insurance, may become subject to value added tax. Charging a lower VAT rate of 12% is an option to avoid deterring people from buying this type of insurance. However, in light of these potential changes, insurers will need to rely on brokers to establish whether their client is a UK VAT registered business or an individual.
Brokers will need to ensure that taxes are paid and proper records are maintained, which are then passed on to insurers. One vital piece of information that brokers must retain and pass on is the policyholder’s UK VAT registration number. This should be included in the policy documents provided to them in case any complications arise with HM Revenue & Customs.
Preparing for the future
Changes to IPT are few and far between, especially compared to the turbulent VAT landscape. However, the UK leaving the EU opens the door for IPT rates to be adjusted or completely abolished by the time the next general election takes place before January 2025.
In the longer term, it is possible that Brexit will result in the Government applying a standard rate of 20% VAT, replacing the current 12% IPT, to many taxable non-life policies. In this scenario, if non-compliant insurers default after switching from IPT to VAT, policyholders could be held liable for any tax due. An 8% tax increase, on the other hand, would be extremely unpopular with voters and could be perceived as a hidden tax that was paid for through higher insurance premiums.
An alternative option is to keep the current IPT rate of 12% on compulsory personal insurance such as home and car insurance. With this approach, the government would be allowed to charge 20% on other forms of insurance without a social aspect, such as directors’ and officers’ liability insurance. Unlike VAT, IPT is a non-refundable cost for all consumers, while VAT-registered businesses can reclaim VAT on the payments they make.
In these uncertain times as the insurance industry seeks to ensure continuity for its clients, it is clear that some consideration needs to be given to the IPT implications of the innovative and diverse solutions emerging on this scene. With an increasing number of possible outcomes to plan for, businesses, including insurers, cannot afford to sit back and wait.
This article does not necessarily reflect the views of The Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Russell Brown is Senior Manager IPT Consulting at Sovos.
The author can be contacted at: [email protected]