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IPT rate increase - HMRC reluctant to apply transitional concession - 2010-07-29
The standard rate of IPT is due to increase from 5% to 6% with effect from 4 January 2011 (and the higher rate from 17.5% to 20% from the same date). Anti-forestalling measures have been in place since 1994, when IPT was introduced, to prevent the tax point (when IPT is due) being artificially bought forward to avoid any increase. The measures, in the main, cover insurance policies with an inception date before the rate increase and with premiums due after 3 January 2011. How the measures impact depends on the basis under which an insurer accounts for IPT, either the cash/premium receipt basis or the "written premium" basis referred to as the "special accounting scheme".
For the cash receipt basis IPT is chargeable at the rate applicable on the date premium is received - for IPT purposes the date of receipt is the date premium is received by either the insurer or the broker for IPT purposes. This will mean that under this method the 6% rate will apply to premium received by either broker or insurer on or after 4 January 2011 regardless of the policy inception date. There are anti-forestalling measures to stop bringing payments forward to avoid the increase. Few insurers use this method.
The "written premium" method (as used by Lloyd's) is more complicated. Under this method IPT is due on the date the insurers accounts show the premium is due. For example if the policy inception date is 1 January 2011 with premiums due in monthly instalments, say on the last day of each month, IPT will be due on each instalment date. However, for policies with an inception date prior to 4 January 2011 with IPT due dates on or after 4 January 2011, there would normally be expected to be transitional rules. Under these transitional rules - that have been used at every rate change in the past - there is a "concessionary period", normally six months (but which can and has been extended in the past by extra statutory concession) whereby the old rate can be used for written premium dates falling within that period. Therefore, under the above example the 5% rate would apply to instalment dates occurring before 4 July 2011, i.e. effectively January - June 2011, after which 6% would apply. All policies with an inception date on or after 4 January 2011 will attract the 6% rate.
A six month concessionary period has been used on all previous occasions when there has been a rate change, except in 1996 when an additional two months was allowed by extra statutory concession due to the introduction of the higher rate of IPT. However, for the forthcoming rate change HMRC has not as yet confirmed a concessionary period, and has indicated there will not be one (despite there being legislative measures to introduce one and that HMRC Notice IPT 1 refers to the measure), and the new rate will apply to written premium dates occurring on or after 4 January 2011. This is currently being challenged by market representative bodies, particularly in light of possible future rate increases and the administrative difficulties the market will face. The lack of a transitional period will have particular impact on contracts put in place before 22 June 2010 with written premium date on or after 4 January 2011, e.g. annual motor or household policies, where the increase may not have been anticipated.
For policies with an inception date after the Budget announcement date, i.e. 22 June 2010, covering a period extending beyond 12 months after the implementation date, i.e. 4 January 2011, anti-forestalling provisions apply where the premium is received or written before the implementation date. For example, if a policy has an inception date of 1 December 2010, the premium is received or written on 1 January 2011 and the policy covers a period to 31 December 2012, IPT at 5% will apply for the period 1 December 2010 to 3 January 2012 and the 6% rate will apply from 4 January 2012 to 31 December 2012.
Similarly, there are anti-forestalling measures to prevent insurers receiving/writing premiums after 22 June 2010 for policies with an inception date on or after 4 January 2011; under these measures the tax point will be deemed to occur on 4 January 2011 and the 6% rate will apply.
Insurers and brokers need to pay careful attention to the anti-forestalling measures between now and 4 January 2011 to ensure that the correct rate is applied to premiums to avoid falling foul of HMRC and creating unforeseen liabilities.
For further information contact Bob Jones, Indirect Tax Partner, on 020 7516 2295 or by email.
