Accounting for Insurance Premium Tax: transitional accounting arrangements: the anti-forestalling provisions
Avoidance of IPT at the time of a change in rate is possible by (for example) taking out a policy for a longer period than usual or paying in advance for a policy which commences after a rate rise. The anti-forestalling provisions are designed to limit the opportunities for tax avoidance. The anti-forestalling provisions are contained in Section 67 of the Finance Act 1994 for the introduction of the tax and sections 67A, B and C for a rate change.
Prevention of prepayment tax avoidance
To prevent tax avoidance by the insured making a prepayment in the period between the announcement of a rate change and the implementation date, certain premiums will be deemed to be received or written on the implementation date, and certain contracts deemed to be made before the date of a rate change.
If a taxable premium is received or written after the date of announcement of a rate change but before the date of a rate change, and relates to a risk commencing on or after the date of a rate change, then IPT must be accounted for at the new rate. The tax point will be deemed to be the implementation date of the rate change.
- The announcement of a rate change is made on 9 March 1999. Implementation date is 1 July 1999.
- A contract underwritten by an insurer using the cash receipts method of accounting for IPT begins on 1 August 1999. The insurer receives the premium on 31 March 1999.
- The insurer will be liable to account for IPT at 5% as if he had received the premium on 1 July 1999.
- The announcement of a rate change is made on 26 November 1996. Implementation date is 1 April 1997.
- A contract incepts 1 May 1997 and the premium is written into the records of an insurer using the special accounting scheme on 1 March 1997.
- The insurer will be liable to account for IPT at 4% as if he had written the premium on 1 April 1997.
Where a concessionary period has been granted and an insurer using the special accounting scheme writes a premium on or after the date of the rate change but before the end of the statutory transitional period and the period of cover for the risk incepts on or after the date of the rate change, the insurer cannot claim that the premium is liable to tax at the old rate (i.e. because the contract was ‘made’ before then). Section 67B(3) of the Finance Act 1994 as inserted by the Finance Act 1997 provides that in these circumstances the contract shall be treated as if it were made on the date of the rate change.
You should note that these anti-forestalling rules will not apply where it is normal for the insurer to create a tax point before the contract incepts.