LONDON: The U.K. government is aiming to rake in a total of 4.1 billion pounds ($5.1 billion) over a five-year period through a further increase in the tax on insurance premiums.
The U.K.’s insurance premium tax (IPT) would rise to 12 percent from 10 percent in June 2017 to help fund HM Treasury’s spending commitments in this year’s Autumn Statement, Chancellor of the Exchequer Philip Hammond said during his Nov. 23 speech in the House of Commons.
“Insurance premium tax in this country is lower than in many other European countries, and half the rate of VAT,” he said.
The announcement comes just eight months after former Chancellor George Osborne increased tax on insurance premiums to 10 percent from 9.5 percent at the 2016 Budget. The latest increase in the rate—affecting areas such as home, car and travel insurance—would raise a total of 4.1 billion pounds from 2017-18 through 2021-22, according to HM Treasury’s Autumn Statement policy costings.
The plan for a 12 percent tax on insurance premiums means the rate will have doubled since the start of 2015, prompting criticism from tax practitioners. At Summer Budget 2015, George Osborne announced an increase in the tax to 9.5 percent from 6 percent.
“It is very disappointing that the government has for the third time targeted insurance as a source of additional revenue for the Treasury without considering the unintended consequences this will have on the public’s access to insurance,” Keith Richards, managing director of the U.K.’s Chartered Insurance Institute, said in an e-mailed statement.
“Both the insurance industry and U.K. customers will be frustrated with this further rise in IPT—the third in just 18 months,” David Bearman, financial services tax partner at EY U.K., said in an e-mailed statement.
“These incremental increases clearly reflect the fact that the Government is committed to not raising other taxes, meaning there is limited scope for revenue-raising measures. We are concerned that this will not be the last increase.”
There was, however, some good news for the insurance industry as documents published alongside the Autumn Statement included a consultation document by HM Treasury on a new regulatory and tax framework on insurance-linked securities.
An alternative form of risk mitigation for insurance and reinsurance firms, insurance-linked securities, or ILS, have become an “important feature” of the world’s reinsurance market, and the U.K. can make a “major contribution” to the market’s growth with the right regulatory framework, Economic Secretary to the Treasury Simon Kirby said in the consultation document.
In the consultation the government proposes establishment of a new corporate structure and a new regulated activity of insurance risk transformation.
The global ILS market is valued at around $70 billion, which amounts to 12 percent of overall reinsurance capital and is forecast to grow to $87 billion by 2019, the consultation said.
“The insurance industry will welcome the Chancellor’s confirmation to publish regulations to develop the ILS market in the UK, which is expected to allow (re)insurers and brokers operating in the London insurance market to develop and issue new products,” Ben Reid, executive director in EY U.K.’s specialty insurance practice, said in an e-mail.
“To be successful, this new market must be complementary to other global ILS centres, and to meet the new requirements of global insurance buyers, London’s world renowned reputation for product innovation should be harnessed,” he added.
