Uncertainty appears to be a hallmark of today’s world. More than two years ago, Brexit officially went into effect, but its economic and social implications are still unfolding. Despite the UK having taken back the reins of its own tax future, insurers still face many issues and concerns regarding insurance premium tax, or IPT. At the time, the vote to leave the EU raised a great number of questions for the industry, and these are still very much with us today.
The full digitalization 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. What’s more, as legislation evolves across various jurisdictions, knowing which rules apply from country to country will be burdensome, and the potential consequences of making a mistake severe.
In this article, we’ll look at some of the main challenges and changes that UK insurers could face in the years ahead in the long-term aftermath of Brexit.
As a result of the Brexit vote, there was a great deal of 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 customers, insurers should take the necessary steps to strengthen and sustain 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 registrations for the UK based entity that were written on a Freedom of Services basis pre-Brexit and notify the appropriate authorities of the change in operating model. This, in turn, will leave the resulting entity responsible for the payment and compliance of taxes. Deregistering these EU registrations is probably the best option for UK-based insurers that are not ceasing operations but continuing to operate in the UK and outside of Europe. This will help to 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 license. 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 live with the regulator, require tax compliance to be maintained until such time as the license is revoked.
As is now common knowledge, UK insurers can no longer write business in the EU on a Freedom of Services basis as the Brexit deal didn’t 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 went into effect on Jan. 31, 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. Generally, EU authorities understand that liabilities written on a Freedom of Services basis may still exist at this stage and that, therefore, there should be some way of facilitating the declaration of such liabilities. Historical liabilities in the Netherlands, for example, can be disclosed through supplementary declarations. Similar processes can also be initiated in Germany, Finland and Luxembourg.
UK entities may find it more difficult to identify historical liabilities if they weren’t initially registered, or have already deregistered, from the country where they established those liabilities. For instance, companies in the UK that wish to declare their IPT in Slovakia are not able to register in the country. However, if only historical liabilities are required to be declared, the Slovakian 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 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 remain registered there until the final accounts have been closed and any unreported liabilities are uncovered and fully declared. Once this is complete, the deregistration process may then be conducted, if necessary. Now that over two years have passed since Brexit took effect, there has been some movement by certain countries, for instance Portugal and Spain, to automatically deregister UK entities with active licenses in those jurisdictions.
Finding a representative who can advise on how to declare and proceed with historical IPT liabilities based, where possible, on the relevant country’s legislation and guidance, is highly recommended.
If changes to IPT are indeed made, 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 calculated properly on policies falls mostly on brokers. Therefore, broker consent would be required before implementing any administrative changes. Not only are IPT rates subject to change, but also the entire reporting process.
For instance, in the UK there is currently a requirement for a quarterly IPT return to be made, but this may be replaced by an annual IPT return, with quarterly payments on account for insurers that pay more than a specific sum of IPT annually. There may well also be changes to the data provided on returns. In other words, underwriters would have to devote much more time to meeting reporting requirements.
Changes to IPT will also influence any insurance choices offered in the EU, including travel insurance. Since Brexit, brokers have exercised far greater caution in order to maintain fully compliant in both jurisdictions. This could negatively affect the level of service they provide compared to before the UK exited the EU because, in some cases, brokers have had to divide up policies and transfer them to other European businesses.
Products that are considered lifestyle choices and exempted from IPT, such as income protection and permanent health insurance of 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 a possibility, 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 ascertain whether their client is a UK-registered business for VAT or a private individual.
Brokers will need to ensure that taxes are paid and correct records kept and subsequently passed on to insurers. One vital piece of information that brokers should save and transmit is the policyholder’s UK VAT registration number. This should be included in the policy documents supplied to them, in case any complications occur with HM Revenue & Customs.
Preparing for the Future
Changes in IPT have been few and far between, particularly in comparison to the tumultuous VAT landscape. However, the UK’s exit from the EU opens the door to IPT rates being adjusted or removed altogether by the time the next general election rolls around before January 2025.
In the long term, it’s possible that Brexit could lead to the government applying a standard rate of 20% VAT, overriding the current 12% IPT, to many taxable nonlife insurance policies. In this scenario, if noncompliant insurers do not meet their obligations after switching from IPT to VAT, the policyholders could be held liable for any taxes due. A tax increase of 8%, on the other hand, would be incredibly unpopular among voters and could be perceived as a stealth tax that has been paid for through higher insurance premiums.
An alternative option is to keep the current IPT rate of 12% across compulsory insurance for private individuals, such as home and motor insurance. With this approach, the government would still be permitted to charge 20% on other forms of insurance with no social aspect such as directors’ and officers’ liability insurance. Unlike VAT, IPT is an irrecoverable cost to all consumers, whereas VAT-registered businesses can recover input VAT on premiums they pay.
In this uncertain time, as the insurance industry strives to provide continuity for its customers, it is obvious that some consideration must be given to the IPT implications of the innovative and diverse solutions emerging in this arena. With a growing 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., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Russell Brown is a Senior IPT Consulting Manager at Sovos.
The author may be contacted at: firstname.lastname@example.org