Be prepared

To pay or not to pay. That is the question. At least it is for brokers considering their options in light of the changes to insurance premium tax (IPT). The reform of IPT, unveiled in draft legislation by chancellor Alistair Darling in his pre-Budget Report late last year, came into effect on 9 December but is only set to become law in next month’s Budget.

Put simply, brokers should have been factoring in IPT at 5% on fees for administering all insurance contracts transacted in the past two months. Except, as with all tax, it’s not quite as simple as that.

The outcry over the arbitrary introduction of the reform means that negotiations between the government and brokers are still ongoing.

Consequently, brokers are unsure whether they should start making provisions to pay the tax or ignore the changes until things are finalised. The confusion is made worse by the fact that the HM Revenue & Customs (HMRC) has promised to issue fresh guidance but cannot confirm whether this will happen before the Budget.

Conflicting advice

The advice from Biba is clear, however: start collecting the tax now and pay up.

Head of compliance Steve Wright warns: “Yes, it is a moving feast at the moment and we are hoping to get clarity this month, but brokers still need to ensure they can pay.”

The association has advised its members to update their systems to accommodate the changes outlined in the draft legislation or, if their systems cannot be updated immediately, to keep paper records of all fees from December until their systems are ready.

Not everyone agrees. Broker Network chairman Grant Ellis advocates the opposite.

“Until the clarification is received, I would do nothing. Our advice is to sit tight,” he says. “We’re hoping the impact on brokers will be reversed. I’m a little surprised we haven’t had an announcement from HMRC but, until we do, brokers shouldn’t collect the tax. The change in the rules was never intended to catch brokers. It’s an unforeseen consequence that HMRC is now aware of. I’m confident that common sense will prevail.”

But brokers that “sit tight” will have to find a lump sum from somewhere if the draft legislation isn’t changed. Moreover, failing to act now means recalcitrant brokers are likely to find themselves caught up in a paper storm, playing catch-up on three-month-old policies.

“You’re damned if you do and damned if you don’t,” Ellis admits. “There are those that are collecting IPT, altering their systems [by manually processing the change] to accommodate it. But if HMRC narrows the scope of the tax – as expected – then those brokers that have collected IPT will have to give it back. They’ll be writing out cheques for as little as 50p or £2 and sending them back to clients.

“It’s a gamble, of course, but doing something pre-emptively could mean you end up shooting yourself in the foot. I can tell you now, if HMRC does amend the draft legislation it won’t turn around to brokers and say ‘we’re terribly sorry and we’ll pay all your costs and reimburse you for all the time you’ve wasted’.”

Playing it safe

It is clear that some brokers will wait and see, particularly those that will have to pay relatively small amounts. But the general consensus is that even if you are not adding it to your customer charges, you should at least be putting the cash aside.

PricewaterhouseCoopers insurance tax division director Ben Flockton says: “Unless, and until, the Revenue announces any change or relaxation to the draft position, you have to assume the changes are going to take effect in full.

“In addition, depending on the way their IPT accounting processes work, some insurers will have had to start paying over the additional IPT at the end of January because the IPT returns for the fourth quarter of 2009 had to be submitted and the tax paid by then.

“Other insurers, who aren’t affected by the January payment, will be paying the additional amounts in April on the first quarter of 2010 returns although, hopefully, by that time there will be greater clarity about the scope of the legislation.”

But paying is not as easy as it sounds. For instance, which insurer should a broker pay IPT on to if they have several invoices on one statement with one fee? Which insurer is responsible for collecting it?

“The obligations become much more complex in that case,” Flockton says. “Who you lodge the IPT payment with will depend on how the contracts are constructed and which of the multiple insurers has the liability to pay. The lead co-insurer would be liable in some contracts but not all.”

So what do brokers and insurers need to do to facilitate IPT payments? The reality is if brokers have not received instructions from insurers explaining how to make the payments, they need to contact the insurers and start making arrangements. But whatever processes insurers and brokers put in place will become redundant if the much anticipated amendments are unveiled between now and the Budget.

“Insurers are scratching their heads wondering how they will engage with brokers to collect this,” Ellis says.

And no one is clear about what – if any – amendments the government might introduce to make the new legislation more palatable.

One option is to narrow the changes so they do not apply to brokers’ charges where the policy has the potential to be placed through a panel of insurers. This would close a loophole highlighted by a recent court case against domestic repair company Homeserve, and exempt brokers. But Flockton is sceptical that such a change is likely to find its way into the final legislation.

“It has been discussed, but I think HMRC has two issues. First, a material change like that would effectively mean abandoning the

9 December implementation date to allow everyone to take account of it – and it’s unlikely to want any further delays to this legislation. Secondly, it does not want to do anything that would water down the measures and potentially leave scope for some businesses to find ways around the provisions,” he says.

HMRC is also unlikely to move on its determination to collect the tax from insurers rather than intermediaries. This single point, probably the issue that is causing the most grumbles among the broking fraternity, appears to be cast in stone. The expense of attempting to collect from brokers would cost far more than the estimated £10m the new measures are expected to raise.

Too much information

This steadfast refusal to deal with intermediaries leaves insurers with an almost surreal responsibility for the collection of a tax that is incurred by brokers. There is also a fear that the legislation will force brokers to share commercially sensitive information with insurers.

“It does give rise to potential tension between some insurers and brokers when insurers find out just how profitable at the customer level this business is,” Flockton says. “I think there’s every chance that some insurers will be pushing for pricing renegotiations with brokers when they have this information.”

Ellis adds: “Most brokers would be very unhappy about releasing absolute details of their fee-charging structure to insurers, but it’s also inappropriate that a broker should have to go through an insurer to pay across something that frankly the insurer can’t verify is an accurate payment. Insurers will be effectively saying to HMRC: ‘Here’s the money … I don’t know if it’s the right amount or not but I’m sending it anyway.’ It’s ridiculous.”

Flockton agrees. “Unless insurers have specific rights of audit and oversight in relation to their brokers’ own contracts and arrangements, it’s going to be very difficult for them to submit their IPT returns with confidence that the numbers are, in fact, accurate and complete. There are real concerns about how insurers are going to introduce effective controls and processes to audit the amounts that brokers are reporting to them as correct,” he says.

Inevitably, the final word must go to the HMRC. A spokesman says it is “very much alive to the industry concerns” and that further guidance will be issued “in due course”. He would not say when the guidance will be published but insists that brokers and other intermediaries should collect the tax due and pass it on to insurers.

So for the Revenue it really is that simple. But for brokers, already struggling in a sea of recession troubles, the continuing confusion is something they could well do without. IT