Calculating the value of the premium: separate contracts: the anti-avoidance provision
In Budget 2010 this loophole was closed by bringing certain amounts charged under separate contracts back into our interpretation of premium if all the following conditions are met. These are:
Condition A: The amounts are charged to individuals who enter into the contracts in their personal capacity - this limits the measure to personal lines insurance where all the avoidance has been found to date. It specifically excludes sole proprietors, partners and directors entering into contracts for business purposes.
Condition B: The separate contract is entered into as a condition of entering into the taxable insurance contract or the individual is unlikely to enter into the separate contract without also entering into the taxable insurance contract - this condition catches the link between the taxable insurance contract and the separate contract(s). The products that have been used for the avoidance are often presented over the internet or by telephone so that entering into multiple contracts is very easy.
Condition C: This condition is specific to the separate contract(s) entered into by the insured person. The insured cannot negotiate the terms or the price of the separate contract - this is an extension of condition B; the customer is entering into additional contracts for which the price and terms are pre-agreed between or by the insurer, intermediaries and any other parties and therefore are not open to renegotiation by the customer, who can only accept them or reject them. If they reject the terms they will not be eligible for the insurance. This condition will be met even if the person is offered a choice of options or an option as to whether to accept optional terms or not. This is because the insured is simply signing up to different pre-determined terms/prices not renegotiating the terms of the separate contract itself.
Condition D: This condition is specific to the contract of insurance. No comprehensive assessment of the individual’s risks is undertaken to arrive at the premium under the taxable insurance contract - in ‘commoditised’ insurance arrangements the level of cover and the price payable are pre-agreed factors and the only consideration is whether the customer is eligible to receive this cover. This is the case even if the customer is offered optional levels of cover at different prices, as these are preset for all eligible customers and the premium is not arrived at following a comprehensive assessment of the customer’s risks. This condition does not refer to the factors the insurers and others use to decide the rates to be charged for various products or levels of cover for a product. The law refers to the amount charged being arrived at without a comprehensive assessment of the individual’s circumstances; this would include situations where the premium is a stated amount or percentage of, e.g. an amount of money borrowed.
ONLY IF THE ARRANGEMENTS MEET ALL THESE CONDITIONS WILL THE AMOUNTS CHARGED BE TREATED AS PREMIUM FOR IPT PURPOSES.