Insurtech UK raises IPT concerns for sector

In the run up to the government’s budget on 6 November as well as the UK’s pending withdrawal from the European Union, Insurtech UK has raised concerns on Insurance Premium Tax (IPT) for the sector.

The government’s proposed changes to bring administration fees into IPT presents significant hurdles that are damaging innovation and only intensifying the already challenging tax burden that is unique to the insurtech sector, the trade body said.

In practice this means that insurtechs face a 20% addition in costs on every single service they purchase, inevitably making them less competitive in the market.

It published a response to HMRC’s call for evidence stating that further reform needs to address the major issue facing insurtech intermediaries – that they are affected both by IPT added to insurance premiums and the VAT on their expenses that they are unable to reclaim.

This is due to the insurance sector being VAT exempt, they are instead charged IPT which cannot be offset against the VAT.

It urges HMRC to undertake a full assessment of how this extension will impact the insurtech sector and to consider “meaningful reforms to IPT to make it fit for purpose”.

It reiterated the government’s ambition for the UK to become “the best place in the world to grow a tech business and that it is therefore vital to alleviate these.

Insurtech UK chair, Niall Barton told Insurance Times: “We have had positive discussions with HM Treasury and HMRC since the formation of Insurtech UK.

“They have been understanding of our concerns around the VAT regime for insurtechs, particularly when combined with IPT. It is clear from discussions that whilst there are merits in our proposals, the current EU VAT regime prevents the government from taking our current suggestions further at this time.”

Disproportionate impact

The trade body believes the administration fees would “have a disproportionate impact on insurtech intermediaries”.

Firstly insurtechs invest heavily in technology it has a “particularly strong impact,” and those who are B2C invest a greater proportion of revenue in technology.

Many insurtechs deal with insurance distribution, the concern is that they will be forced to pass on the cost of IPT to customers through premiums.

At present insurtechs do not underwrite risk using their own capacity, instead they rely on insurance carriers for this which allows them to offer competitive premiums to their customers

However, the result of including administration fees within IPT is that underwriters will in turn add this cost into the final premium, leaving both insurtechs and its customers at a loss.

In such a price sensitive market, any increased costs are felt more acutely by insurtech startups who are in their infancy.

Suggestions 

Meanwhile the impact of this is heightened by insurtech intermediaries being unable to offset increased IPT against existing VAT costs.

It suggested a partial exemption from VAT to insurtech intermediaries to enable them to grow first without the liability of costs. If this happens startups will be able to backdate their VAT.

The trade body has also suggested a minimum threshold for gross written premium (GWP) to allow insurtechs the headroom to scale more effectively.

While many of Insurtech UK’s members benefit from research and development (R&D) tax credits, it suggested an increase in R&D tax relief for insurtechs that are not eligible to reclaim VAT.

The ABI has also asked for the rate of IPT to be cut, given that it has doubled since 2015 and increased from 10% to 12% in June 2017, meaning it is the 7^th highest in Europe. It found that over the last five years IPT revenue has risen by 109%, for example in 2018/19 IPT raised £6.19bn which is more than the taxes on wine, spirits, betting and gambling.

The ABI recently revealed the impact of repeated IPT rises on commonly held insurance products. 

Line of Business		Additional amount IPT at 12% currently adds to the average policy cost	Typical premium saving if 1PT reduced to 6%
Motor	Private Car Comprehensive	£50.06	£25.03
Property	Combined Buildings & Contents	£33.59	£16.79
	Buildings Only	£27.35	£13.67
	Contents Only	£13.76	£6.88
Pet	Overall	£39.96	£19.98
	Dog	£43.43	£21.72
	Cat	£25.60	£12.80
Private Medical Insurance	Overall	£166.70	£83.35
	Personal	£272.65	£136.33
	Corporate	£128.11	£64.06

Source: ABI

Hope

But there might be light at the end of the tunnel for insurtechs as the UK prepares to leave the EU.

Barton added: “Our future relationship with the EU post-Brexit, may enable the UK government to review this situation going forward. Equally should Brexit not come to pass, Insurtech UK will continue to explore options with government to ensure the most favourable regulatory conditions exist for Insurtechs to thrive.”