Insurance premium tax: Calculating the value of the premium: Intermediaries: Intermediary discounted premiums
IPT05500 explains how the value of premium liable to IPT can be reduced by the insurer offering a discount. Because of their position in negotiating premiums, intermediaries can also offer discounts. Intermediaries are also free to charge fees either in addition or separate to their commission from the insurer (see IPT05160 for more information on intermediary fees).
Discounted premiums can arise when an intermediary decides to forgo some or all of the commission they are entitled to from the insurer on the sale of a contract of insurance, so that they can give a discount to the customer by subsidising the premium due to the insurer.
IPT is due on the premium actually received by the insurer or by the intermediary on the insurer’s behalf on each individual policy irrespective of who pays it or how it is paid. There are two potential scenarios:
- 1) Unauthorised discounts
Where the intermediary has an agreed fixed rate of commission on the premium booked by the insurer, and it is clear that the insurer does not consent to the intermediary accepting a lower commission in order to secure a sale, IPT is due on the full premium that is set by the insurer even if the customer pays a lesser amount. For example, an insurer sets the premium at £100 including the intermediaries’ commission entitlement of £20. The intermediary has no legal or contractual right to vary any of these amounts, but can if he chooses give away some or all of its commission to reduce what the customer actually pays. In this event, IPT remains due on the full £100.
- 2) Authorised discounts
Where the agreement with the insurer grants the intermediary delegated authority to set the gross premium and thereby to determine the level of commission, subject to any agreed minimum premium that is receivable by the insurer. IPT will be due on the premium actually charged to the customer or the agreed minimum, whichever is higher. Examples based on £80 minimum premium plus an agreed rate of commission between 0% and 20%:
- If the intermediary sells the product to the customer for £100 and receives £20 (20%) commission out of that, IPT is due on the premium of £100.
- If the intermediary sells the product for £90 and receives £9 (10%) commission, IPT is due on the premium of £90.
- If the amount due to the insurer under the insurance contract is £80, but the intermediary collects £70 from the insured, receives £0 (0%) commission and funds £10 of the cost of the premium cost himself (i.e. negative commission), IPT is due on the premium of £80 received by the insurer.
As in the last of these examples, if the intermediary decides to set the premium below the agreed minimum premium (sometimes referred to as “negative” commission), i.e. in effect, to receive no commission and to pay part of the premium himself, the minimum premium is the amount received by the insurer (this being the amount due under the contract of insurance) and this is therefore the amount that IPT is due on, even though the customer is actually paying less than that minimum amount.
Different approaches may be taken by intermediaries when recording these arrangements in their accounts. This is not a problem as long as tax is correctly accounted for and a consistent approach that adheres to normal accounting rules and practises is taken. However, IPT is due on the premium on each individual policy and it is not permissible to net off negative and positive commissions to achieve a reduction in the amount of IPT due across all the policies sold by a particular intermediary.