A taxing matter

The sound of barrels being scraped can currently be heard from one end of Whitehall to another, as Prime Minister David Cameron’s gloomy speech earlier this week made plain.

The new government has promised that public spending will bear the brunt of the effort to restore the public finances. But the size of this repair job is truly colossal. The deficit for this year is £163bn for this year alone.

As a result, speculation is raging that the general rate of insurance premium tax will be increased in the upcoming emergency Budget.

In this week’s Insurance Times, we reported that the Treasury has asked for information on the comparative rates across the EU, no doubt to see whether an increase on the headline rate will hamper the UK’s competitiveness as an insurance centre. The results show that the UK’s general rate of 5% is low compared to the EU’s other major nation states.

IPT currently raises £2.3bn, the vast majority of which is generated via the lower general rate of 5% rather than the higher 17.5% level. On this basis it would only a 2.5% rise in the general rate to raise a billion pounds.

As Richard Asquith partner at accountants TMF notes, there are relatively little few political downsides involved in increasing a tax that very few customers know they are even paying. Also, as an indirect tax so, IPT can be raised with little or no notice.

The downside is of course that any increase in the rate is bound to have an impact on premiums. In turn, as Biba has warned this week, consumers and businesses will be less to take out insurance protection – already a growing risk thanks to the recession.

It called on the government not to treat IPT as an easy option.

However, with truly savage cuts being contemplated to well-loved services like parks and libraries, the industry will have its work cut out making its case.