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Captives feature in HMRC premium tax consultation

Members have until 17 July to respond; Christophe Bourdaire of Sovos explains the key points

HM Revenue & Customs (HMRC) launched a public consultation in relation to Insurance Premium Tax (IPT) on 3 June, calling for evidence as it seeks to further understand and modernise IPT.

The aim of the consultation is to:

  • Assess that the IPT collection process is efficient and allows HMRC to collect the expected amounts of IPT, and
  • Understand the new ways of writing insurance and ensure these are covered by the IPT legislation and HMRC guidance.

HMRC highlights several areas where some improvements and clarifications could be achieved:

  • Administration and arrangement fees: this part mainly deals with the commercial arrangements made between brokers and insurers. HMRC wants to avoid IPT being used as a tool for unfair competition on the insurance market.
  • IPT return and exempt premiums: HMRC currently does not require insurers to report their exempt premiums on the tax return.
  • IPT registration: HMRC is looking to assess several issues:
    • Is IPT group registration relevant or should it be aborted?
    • Should a captive report to HMRC who its parent company is?
    • How can insurance stakeholders (brokers, insureds, etc.) be aware whether an insurance entity is registered to file IPT in the UK? Should a public IPT register be created?
  • Collection of IPT: The IPT is normally declared by the registered insurance entity. Should other ways of collecting IPT be investigated (e.g. from the insured and/or for the broker) in order to reduce the potential use of unregistered insurance entities?

What it means for Airmic members

This type of consultation is in line with HMRC's culture towards IPT. Across Europe, HMRC is usually seen as one of the most proactive tax authorities with detailed guidance and a will to understand the evolution of the insurance market to ensure that IPT rules are aligned to new market practices. It also comes at a time when European Union (EU) territories are looking to collect more information from their taxpayers and particularly on their compliance processes.

For captive insurers we can see a few areas where they could be impacted. One outcome of the consultation may lead to the obligation to report more information on the IPT return, particularly the volume of international risks covered. One potential implication is that HMRC would have more information to be able to challenge premium allocations.

This highlights the importance of evidence supported and regularly reviewed premium allocation rules within the captives. Captives could also be required to report the name of their parent company. The aim is for HMRC to better understand the type of risks captive insurers are covering. For pure captives, this should not be a high administrative burden, but more clarity should be brought to third party captives or protected cell companies.

In the UK, the liability to account for IPT sits with the insurer. However, when HMRC is unable to recover any unpaid liabilities from the insurance company they could try and recover them from the insured. This would be the case when the insurance company is based in a jurisdiction where HMRC does not have any special arrangements to recover the IPT from the insurer.

To further deter the use of unregistered insurers, HMRC is proposing to expand the scope of their powers to issue assessments for any unpaid IPT liabilities directly to the insured rather than to the insurer. In practice this would mean that HMRC could issue assessments directly to the captive's parent company and not just to the captive itself in the event where the captive has not registered and settled IPT.

Through the consultation, HMRC is hoping to identify or confirm any possible distortion to the insurance market arising from market practices that exclude some administration and arrangements fees. This could lead to some clarification of the IPT scope in either the legislation or the IPT guidance.

By giving the opportunity to the insurance market to share its experiences, HMRC is also seeking to reduce potential IPT gaps, like those arising from unregistered insurance entities and from new practices between brokers and insurers. On that point, it is worth noting that other EU territories already provide the possibility, or sometimes the obligation, for local brokers to register for IPT which allows local authorities to directly collect the IPT due.

By involving insurance stakeholders, HMRC is encouraging collaboration to identify ways in which IPT can be modernised to increase efficiency and transparency for both business and HMRC. The underlying concern of this consultation for insurance entities will obviously be an eventual future increase to the IPT rate in the UK. While the terms set by this consultation do not provide clarity on that aspect, it will certainly provide food for thought for the government ahead of the next Budget announcement.

Answers to the consultation can be sent either by email (operation.ofIPT@hmrc.gsi.gov.uk) or by post. The deadline to answer the consultation is 17 July 2019.

Christophe Bourdaire is senior regulatory specialist, regulatory analysis, at Sovos