Accounting for Insurance Premium Tax: transitional accounting arrangements: additional premiums
Where an insurer is using a cash receipts method, any additional premiums that relate to a taxable insurance contract which are received on or after the implementation date will be subject to tax at the new rate regardless of the contract inception date.
Where an insurer is using the special accounting scheme, and a concessionary period has not been granted, the new rate of tax will apply to any additional premiums with tax points under the special accounting scheme falling on or after the implementation date regardless of the inception date of the contract.
Where an insurer is using the special accounting scheme, and the concessionary period has been granted, any additional premiums written on or after the implementation date, but relating to contracts incepting before that date, are liable to tax at the old rate provided that:
- the tax point relating to that instalment occurs before the end of the transitional period, and
- the additional premium written does not relate to a new risk.
This is essentially an anti-avoidance measure, known as anti-forestalling, to help prevent abuse of the transitional arrangements. The intention is to prevent new risks, which would normally be the subject of a new policy, being added to a pre-rate change contract and therefore benefiting from a lower tax rate. The following examples illustrate this.
Example 10 (1997)
- An insurer underwrites a policy covering a company’s fleet of cars and assumes the risk before 1 April 1997.
- During the transitional period the company sells some vehicles and replaces them with other, more expensive, vehicles.
- Following their normal practice the insurer does not create a new policy but simply extends the cover under the existing policy and calls for an additional premium, which they receive or write before 1 October 1997. The additional premium will be liable to IPT at 2.5 per cent (i.e. the old rate).
Example 11 (1999)
- An insurer underwrites a policy - made before 1 July 1999, which covers a building in Somerset.
- In August 1999 the owner of the building purchases a second building in central London and, to avoid IPT at the new rate, he asks for it to be covered under the policy which covers the building in Somerset. If it would be the insurer’s normal practice to create a new policy for the second building this building constitutes a new risk.
- If the insurer agrees to add it to the original policy the related additional premium will be liable to IPT at 5 per cent, even if the insurer receives or writes it before 1 December 1999 because it is not the insurer’s normal practice to add new risks to existing policies.
Example 12 (1999)
- The insurer underwrites a policy - before 1 July 1999. This covers four shops in a small arcade, with identical terms of cover.
- The owner of the shops buys another one in the same arcade, and requires exactly the same cover. Following their normal practice, the insurer adds the fifth shop to the existing policy and calls for an additional premium, which they receive or write before 31 December 1999.
- The additional premium will be liable to IPT at 4 per cent (the old rate).
This concept of normal practice is the insurer’s normal practice and not the market’s normal practice. Therefore a risk is ‘new’ if it would be the insurer’s normal practice to create a new contract or policy to cover that risk. Thus policing the transitional arrangements and making sure there is no abuse is very much down to the discretion of local officers and your knowledge of your insurer. If there is any attempt by an insurer to misrepresent his normal practice so as to benefit from this approach outlined here, you should consider assessing for the amount of tax which is under-declared.
All additional premiums written on or after the implementation date, in respect of taxable risks, are subject to the new rate, where the cover under the policy incepts on or after the implementation date. All additional premiums written on or after the concessionary date are subject to the new rate, regardless of when the policy incepted.