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 implications are still unfolding. Despite the UK taking the reins of its tax future, insurers still face many issues and concerns about insurance premium tax, or IPT. At the time, the vote to leave the EU raised a number of questions for the industry, and these are still very much with us today.
Full digitization of IPT is a possible destination on the horizon. Insurers and brokers will be required to share transaction data much more frequently with the government. Furthermore, as legislation evolves across different jurisdictions, knowing which rules apply from country to country will be cumbersome and the potential consequences of making a mistake severe.
In this article, we will look at some of the key challenges and changes UK insurers may face in the coming years as a result of the long-term Brexit.
As a result of the Brexit vote, there was great uncertainty as to whether UK insurers would be able to insure risks located in the remaining 27 EU member states, and whether EU insurers would be able to insure UK risks. In order to insure their customers, insurers must take the necessary steps to strengthen and support their business.
One area in particular that lacks clarity is deregistrations. If a company has merged with an EU-based insurer, it is important that it closes its old tax records for the UK-based entity that were written on a Freedom of Services basis before Brexit and notifies the relevant authorities for the change in the operating model. . This, in turn, will leave the resulting entity responsible for tax payment and compliance. Deregistration of these EU registrations is probably 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 to simplify the remaining registrations and any other reporting requirements from the company’s perspective.
It is also important to consider the impact of UK company deregistrations on related passporting claims and licences. Tax records may be held until accounts are reconciled and closed. However, in such cases, some countries such as Germany, Portugal and Spain, where the license is still direct with the regulator, require that tax compliance be maintained until such time as the license is withdrawn.
As is already known, UK insurers can no longer write business in the EU on the basis of Freedom of Services as the Brexit agreement did not include relevant provisions for financial services. With this in mind, another potential area of uncertainty for many UK insurers is how to declare and settle historical IPT liabilities incurred by their UK entities before Brexit took effect on January 31, 2020.
How do UK insurers present historical IPT in the EU? This varies from country to country, as do most related compliance topics. In general, the EU authorities recognize that obligations written on the basis of Freedom of Services may still exist at this stage and that, therefore, there should be a way to facilitate the declaration of these obligations. Historical liabilities in the Netherlands, for example, can be disclosed through supplementary statements. Similar processes can be started in Germany, Finland and Luxembourg.
UK entities may find it more difficult to identify historical liabilities if they were not originally recorded, or have already been de-registered, from where they incurred those liabilities. For example, UK companies wishing to declare their IPT in Slovakia are unable to 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 formally completing an IPT registration.
While the following advice may conflict with the deregistration guidance given above, we recommend that, as a general rule, if a UK insurer anticipates that it will have historical liabilities in an EU jurisdiction, it should stay recorded there until the final accounts are closed and any unreported liabilities are fully disclosed and declared. Once this is completed, the de-registration process can then be carried out, if necessary. Now that more than two years have passed since Brexit took effect, there have been moves by some countries, for example Portugal and Spain, to automatically deregister UK entities with active licenses in those jurisdictions.
It is highly recommended to find a representative who can advise on how to declare and proceed with historical IPT obligations based, where possible, on the relevant country’s legislation and guidelines.
If changes are indeed made to IPT, the insurance sector will have to deal with an increased amount of administrative work. Today, the burden of ensuring that premium taxes and pre-fiscal charges are properly calculated on policies falls largely on agents. Therefore, the broker’s consent will be required before any administrative changes are implemented. Not only can IPT rates change, but so can the entire reporting process.
For example, in the UK there is currently a requirement to make a quarterly IPT return, but this could be replaced by an annual IPT return, with quarterly payments on account for insurers paying more than a specified amount of IPT per year. There may also be changes in the data provided for returns. In other words, insurers will have to spend much more time meeting reporting requirements.
The changes to IPT will also affect any insurance choices offered in the EU, including travel insurance. Since Brexit, brokers have exercised much greater care to maintain full compliance in both jurisdictions. This could adversely affect the level of service they provide compared to before the UK left the EU because, in some cases, brokers have had to split policies and transfer them to other European businesses.
Products that are considered lifestyle choices and exempt from IPT, such as income protection and permanent health insurance of at least five years, as well as other life and term insurance, may become subject to value added tax . Setting 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 intermediaries to ascertain whether their client is a UK VAT registered business or a private individual.
Intermediaries will have to ensure that taxes are paid and accurate records are kept and then passed on to insurers. An important piece of information that brokers must store and pass on is the policyholder’s UK VAT registration number. This should be included in the policy documents provided to them, in case of any complications with HM Revenue & Customs.
Preparing for the Future
Changes in IPT have been 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 removed entirely by the time the next general election takes place around January 2025.
In the longer term, it is possible that Brexit could lead to the application of a standard rate of 20% VAT, overtaking the current IPT of 12%, for many taxable non-life insurance policies. In this scenario, if insurers fail to meet their obligations following the switch from IPT to VAT, policyholders may be liable for any tax due. An 8% tax increase, on the other hand, would be highly unpopular among voters and could be perceived as a hidden tax that is paid for through higher insurance premiums.
An alternative option is to retain the current 12% IPT rate on compulsory insurance for private individuals, such as home and motor insurance. With this approach, the government would be allowed to charge 20% for other forms of insurance without any social aspect, such as directors’ and officers’ liability insurance. Unlike VAT, IPT is a sunk cost for all consumers, while VAT-registered businesses can recover input VAT on the premiums they pay.
In this uncertain time, as the insurance industry struggles to ensure continuity for its customers, it is clear that some consideration must be given to the IPT implications of the innovative and diverse solutions emerging in this arena. 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 opinion of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Information about the author
Russell Brown is a Senior Manager of IPT Consulting at Sovos.
The author can be contacted at: [email protected]