‘Insurers will have to rely on brokers’ if post-Brexit tax changes come to fruition

After the UK leaving the European Union (EU) on 31 January 2020, the insurance industry is still grappling with the resultant regulatory and trading changes.

This includes the introduction of the Financial Services and Markets Bill, which was published in July 2022 - the bill aims to repeal EU laws that currently govern UK financial services firms, such as Solvency II requirements, and bolster the competitiveness of the UK as a global financial centre.

The bill is expected to be signed into law during the first half of 2023.

Due to ongoing Brexit-related changes, however, ”insurers will have to rely on brokers” - especially when it comes to potential amendments to the insurance premium tax (IPT) regime, Russell Brown, senior IPT consulting manager at tax and regulatory compliance software firm Sovos told Insurance Times. 

IPT is a tax on general insurance premiums, excluding certain exemptions, that is paid to HM Revenue and Customs (HMRC). It is currently set across two levels - a standard rate of 12% and a higher rate of 20% for travel insurance, mechanical or electrical appliances insurance and some vehicle insurance.

Brown does not believe the UK government could apply IPT to all policies - with no exemptions - in a post-Brexit era, but it is possible that value-added tax (VAT) rates could instead “be tailored to insurance types to help the government generate more revenue”.

This could include, for example, long-term insurance products that are currently exempt from IPT - such as income protection and permanent health insurance of at least five years - becoming subject to VAT payments.

Brown said: “With these potential changes, insurers will have to rely on brokers to determine whether the policyholder is a business or private individual.

“Due to their vital role in ensuring correct taxation and maintaining records, brokers will need to be heavily involved in these [tax change] discussions. For example, brokers would need to store and submit key information, such as policyholders’ VAT registration number, in case of any questions from HMRC.”

These possible changes to IPT will have an impact on insurance that applies in the EU too, such as travel insurance.

Brown continued: “As a result of Brexit, brokers have had to become a lot more cautious to stay fully compliant in the two different jurisdictions.

”It has sometimes been necessary for them to break up policies and hand them over to other European companies, meaning they haven’t been able to provide the same service as prior to leaving the EU.” 

Preparation for tax change

The changes described by Brown around IPT and VAT are yet to be seen. Although a two-year consultation was meant to launch in the spring of 2022, this was put on the back burner due to the cost of living crisis, the war in Ukraine and internal difficulties within the Conservative party.

“The longer the delay with the consultation, the likelihood of IPT being replaced with VAT in the near future is reduced, so while insurance companies and brokers in the UK should prepare for this eventuality, this process will take time,” Brown noted.

”As a next step, the government will hopefully conduct another consultation and schedule regular Industry Liaison Group meetings between HMRC and stakeholders.”

If the switch from charging IPT on insurance policies to VAT did proceed, however, this would need to be ”clearly communicated to customers in a timely fashion”, Brown added. Policy documents would also need to be updated to ensure that VAT was mentioned instead of IPT.

He continued: ”If VAT was charged on an insurance policy instead of IPT, this would be beneficial to customers that are VAT registered as they could recover input VAT on their premiums, which they can’t do with IPT [because it] is an irrecoverable cost .

”For non-VAT registered customers, the situation won’t change. They would likely have to pay more tax without the chance of any recoverability, unless insurers [reduced] their pre-tax premiums accordingly before they [added] VAT to the amount [customers] have to pay.”

Brokers working abroad

As well as potential tax changes increasing administration work for brokers, there are also a number of operational challenges that insurance businesses are having to overcome in order to trade in the post-Brexit environment. 

This includes the requirement of setting up a European operation if UK-based firms want to continue trading in EU countries.

One Lloyd’s of London broker and insurtech that has encountered this is Superscript, it provides insurance for small businesses.

Ben Rose, chief underwriting officer at Superscript, said: “Insurtechs and brokers are facing problems parallel to other industries with regards to Brexit. Namely, additional processes, paperwork and resources to operate in Europe.”

For example, when Superscript launched its advisory service, SuperscriptQ, in Europe last November, Brexit had three noticeable impacts for the insurtech.

Firstly, Superscript had to gain European regulatory authorisation.

Rose explained: “We [based] our European operations in the Netherlands and gained passporting approval through the Association of Financial Mutuals (AFM) to operate throughout the European Economic Area (EEA). Before Brexit, Superscript could have operated in Europe with our UK entity without the need to go through any of this.”

Secondly, Rose noted that Brexit-related regulations mean that back office technology is subsequently “more complex and has to work harder to deliver a consistent, highly optimised user experience for our UK and EEA customers”.

Thirdly, global supply chain and inflation issues are also having an impact on claim settlements – both reinstatement costs and the amount of time to source materials has increased.

“With the UK being hit harder by inflation than some of our European counterparts and additional red-tape around importing goods, this results in lengthier and costlier claims,” Rose added.