know about this Post-Brexit changes to UK insurance premium tax
in complete details.
Uncertainty seems to be a hallmark of today’s world. More than two years ago, Brexit officially entered into force, but its economic and social implications are still unfolding. Even though the UK has taken back control of its own fiscal future, insurers still face many issues and concerns regarding the Insurance Premium Tax, or IPT. At the time, the vote to leave the EU raised a host of questions for the industry, and these are still with us today.
The complete digitization of IPT is a likely destination on the horizon. Insurers and brokers will be required to share transactional data much more frequently with the government. Furthermore, as legislation evolves in various jurisdictions, knowing which rules apply from one country to another will be burdensome and the potential consequences of making a mistake will be severe.
In this article, we will look at some of the main challenges and changes that UK insurers could face in the coming years as a consequence of Brexit in the long term.
As a result of the Brexit vote, there was much uncertainty as to whether UK insurers would be able to insure risks located in the remaining 27 EU member states, as well as whether EU insurers would be able to insure UK risks. To reassure their clients, insurers must take the necessary steps to strengthen and sustain their business.
One area in particular that lacks clarity is the casualties. If a company has merged with an EU-based insurer, it is important that it closes its previous tax records for the UK-based entity that were written on the basis of the Freedom of Services before Brexit and notify the corresponding authorities 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 registries is probably the best option for UK based insurers that are not going out of business but continue to operate in the UK and outside Europe. This will help streamline remaining records and any other reporting requirements from a business perspective.
It is also important to consider the impact of UK business registration cancellations on claims and the associated passport licence. Tax records may be kept until accounts are reconciled and closed. In such cases, however, some countries such as Germany, Portugal and Spain, where the license is still in force with the regulator, require that tax compliance be maintained until such time as the license is revoked.
As is well known, UK insurers can no longer do business in the EU on the basis of freedom of services, as the Brexit deal did not include relevant provisions for financial services. With that 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 came into effect on January 31, 2020.
How do UK insurers present historical IPTs in the EU? This varies from country to country, as do most related compliance issues. In general, the EU authorities understand that at this stage there may still be responsibilities underwritten on the basis of the freedom of services and that, therefore, there should be some way of facilitating the declaration of such responsibilities. Historical liabilities in the Netherlands, for example, can be disclosed through supplemental declarations. Similar processes can also be started in Germany, Finland and Luxembourg.
UK entities may find it more difficult to identify historical liabilities if they were not initially recorded, or have already been derecognized, from the country where they established those liabilities. For example, UK companies wishing to declare their IPT in Slovakia cannot register in the country. However, if only historical liability declarations are required, the Slovak tax authority has confirmed that insurers can appoint a representative to settle these amounts without an IPT registration being formally completed.
While the following advice may contradict the deregistration guidance provided above, we recommend that as a general rule of thumb, if a UK insurer anticipates having historical liabilities in an EU jurisdiction, it should remain registered there until final accounts are settled. have been closed and Any unreported liability is fully disclosed and disclosed. Once this is complete, the unsubscribe process can be completed, if necessary. Now that more than two years have passed since Brexit came into effect, some countries, for example Portugal and Spain, have taken steps to automatically de-register UK entities with active licenses in those jurisdictions.
It is strongly recommended to find a representative who can advise on how to declare and proceed with historical IPT liabilities depending, where possible, on the relevant country legislation and guidance.
If changes are indeed made to the IPT, the insurance industry will have to deal with a greater amount of administrative work. Today, the burden of ensuring premium taxes and parafiscal charges are correctly calculated on policies falls primarily on brokers. Therefore, broker consent would be required before any 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 make a quarterly IPT refund, but this can be replaced by an annual IPT refund, with quarterly payments on account for insurers paying more than a specified amount of IPT annually. There may also be changes in the data provided in the declarations. In other words, subscribers would have to spend much more time to comply with the information requirements.
Changes to IPT will also influence the insurance options offered in the EU, including travel insurance. Since Brexit, brokers have exercised much more caution in maintaining full compliance in both jurisdictions. This could negatively affect the level of service they provide compared to before the UK left the EU because in some cases brokers have had to split up policies and transfer them to other European companies.
Products that are considered lifestyle options and are exempt from the IPT, such as income protection and permanent health insurance for at least five years, as well as other life and long-term insurance, may be subject to income tax. value added. Charging a lower VAT rate of 12% is one possibility, to avoid dissuading people from buying this type of insurance. However, in light of these potential changes, insurers will need to rely on brokers to determine whether their client is a UK VAT registered business or an individual.
Brokers will need to ensure that taxes are paid and correct records are kept and subsequently passed on to insurers. One vital piece of information that brokers must store and pass on is the UK VAT registration number of the policy holder. This should be included in the policy documents provided to them, in the event of any complications with HM Revenue & Customs.
Preparing for the future
Changes to IPT have been few and far between, particularly compared to the tumultuous VAT landscape. However, the UK’s exit from the EU opens the door for IPT rates to be adjusted or removed altogether by the time the next general election rolls around before January 2025.
In the long term, Brexit may lead to the government applying a standard rate of 20% VAT, overriding the current IPT of 12%, to many taxable non-life insurance policies. In this scenario, if defaulting insurers fail to meet their obligations after switching from IPT to IVA, policyholders could be held liable for taxes owed. An 8% tax increase, on the other hand, would be incredibly unpopular with voters and could be perceived as a hidden tax that has been paid for through higher insurance premiums.
An alternative option is to maintain the current IPT rate of 12% on all mandatory insurance for individuals, such as home and car. With this approach, the government could still charge 20% on other forms of insurance without a 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 strives to provide continuity to its customers, it is obvious that the IPT implications of the innovative and diverse solutions emerging in this field must be considered. With a growing number of possible outcomes to plan for, businesses, including insurers, can’t afford to sit back and wait.
This article does not necessarily reflect the views of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or their owners.
Russell Brown is a Senior Manager of IPT Consulting at Sovos.
The author can be contacted at: [email protected]