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HMRC internal manual

Insurance Premium Tax

Overview and the law: why we have an Insurance Premium Tax

Insurance Premium Tax was introduced in 1994 to raise revenue from a sector that was viewed as under-taxed and is not subject to VAT. The law relating to indirect taxation on insurance in the European Union, is contained in Article 135 and Article 401 of the Principal VAT Directive 2006/112 (formerly Articles 13B(a) and 33(1) of the Sixth VAT Directive). Article 135(1)(a) provides an exemption from VAT for:

‘insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents.’

Because of this exemption, it was not possible to extend the scope of VAT to include insurance. However, Article 401 of the Principal VAT Directive states:

‘Without prejudice to other Community provisions … this Directive shall not prevent a member state from maintaining or introducing taxes on insurance contracts, which cannot be characterised as turnover taxes…’

As IPT is a tax on insurance premiums, and not a turnover tax, it meets these conditions. This was confirmed by the ECJ in the case of Gil Insurance and others [C-308/01].

Gil Insurance and a number of other companies were involved in supplies of insurance relating to domestic appliances. Amongst other issues, Gil contended that the higher rate of IPT could be characterised as a turnover tax - prohibited by Article 33 of the Sixth Directive (now Article 401 of Council Directive 2006/112). The ECJ considered the characteristics of a turnover tax, such as VAT compared to IPT in the UK and concluded at paragraph 37 of their judgement,

‘Consequently, the answer to the second question must be that a tax on insurance premiums such as that at issue in the main proceedings is compatible with Article 33 of the Sixth Directive. ‘

This is confirmed at paragraph 44 of the judgement:

‘It follows from the answer to Question 2 that a tax such as IPT does not constitute a turnover tax prohibited by Article 33 of the Sixth Directive.’