23 March 2017

Top 5: Tips For Managing IPT

Marketing Team

Tax Expert Justine McInnes outlines what insurance brokers can do to keep up to speed with the changing worlds of IPT in a recent Insurance Age article.

Insurance Premium Tax (IPT) does have a twist for a broker. They have the obligation HMRC in their accounting for IPT, but they then must legally pay this amount to the insurers, rather than HMRC.

This exposes the brokers’ liability for IPT in two ways: It means that not only does the broker bear the cost of any IPT which it cannot pass onto the insured, but if any errors occur, it's the broker who is liable for underpaid IPT and associated costs.

With this in mind, and with the next IPT rate rise taking effect on 1 June 2017, here are 5 tips for managing your IPT responsibilities

1. Know your insurer's IPT accounting system

Brokers should be familiar with the accounting scheme used by each insurer for whom they sell policies. Different accounting schemes can give rise to different IPT liabilities - particularly in the months before and after an IPT rate change.

Take this example. On 30 April 2017, a broker receives a premium of £110 for a new policy. On 2 June 2017 this is written into the insurer's accounts.

If the insurer uses the cash receipts scheme, IPT of £10 will be due as the premium is considered to have been received on 30 April 2017 so the 10% rate applies.

Conversely, if the insurer uses certain types of special accounting scheme, IPT of £11.79 are due as the premium is considered to have been received on 2 June 2017 so the 12% rate applies.

2. Beware of IPT on Mid-Term Adjustments

IPT calculations on MTAs can be complex.

Say a broker refunds £55 of the £110 premium to the insured on 30 June 2017, but simultaneously, sells a new policy to them for £112 - resulting in a net payment of £57 from the insured. A ‘blended' IPT rate of 12.28% should be applied to this net payment to ‘extract' the IPT amount due.

The calculation of the ‘blended rate' will depend on a variety of factors. Guidance should be sought if the position is unclear.

3. Review the Bordereaux

Bordereaux are a hornet's nest for very expensive errors -including arithmetical errors and incorrect IPT rates.

To reduce the risks, bordereaux should be subject to first and second reviews by appropriate staff.

4. Check broker agreements

Frequently IPT terms in broker agreements are unclear and/or outdated. This can lead to IPT disputes between brokers and insurers.

The terms of broker agreements should therefore be considered before the agreements are entered into, and existing agreements should be reviewed regularly.

5. Manage the cost of IPT

It's easy to forget that there are many ways in which the IPT cost can be significantly reduced.

Examples include ‘extracting' the ‘non-insurance' and therefore non-IPTable elements from insurance policies, apportioning premiums for global policies in an IPT-efficient way, and restructuring insurance policies into other vehicles such as trusts. It's well worth therefore, reviewing policies which are sold to ensure that they are as IPT-efficient as possible.

IPT is a deceptively complex tax. If in doubt - and to prevent significant costs arising - seek advice.

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