Different rates of taxation on policies sold by brokers would have to be determined by the government. All policies could be taxed at 20 per cent or 12 per cent, or VAT rates could vary based on insurance type – thereby generating more revenue for the government.
Insurance companies should consider the social aspects of such a tax, as it will inevitably be passed on to end users. Life and long-term insurance products such as income protection and permanent health insurance of at least five years – which are deemed to be lifestyle choices for the insured and are exempt from IPT – could become subject to VAT. A reduced rate of 12 per cent could be charged to avoid discouraging people from taking out such insurance.
This approach could be used by the government to fund the short gap in the revenue they could have by charging 12 per cent on motor and property insurance to private individuals instead of 20 per cent.
It could also be argued that as these types of policies are more likely to be taken out by people who are middle to higher income wage earners that they would not be dissuaded from taking out such lifestyle insurance products just because they have become subject to VAT, so it may be a good way for the government to increase their tax revenue by implementing a change on people who can afford it.
However, with these potential changes, insurers will be reliant on brokers to check whether their client is a business or private individual. As such, brokers will need to be heavily involved in these discussions, as they play a crucial role in ensuring correct taxation and maintaining records, which they pass onto insurers. For instance, one key piece of information brokers would need to keep and pass on would be the policyholder’s VAT registration number – in case of any questions from HMRC.
Preparing for the future
If the replacement of IPT with VAT is confirmed, brokers would need some lead time to implement this change. When IPT was last raised, brokers were given time with transitional measures in place to ensure they charged the correct tax rates. As brokers are unlikely to be made responsible for settling VAT, they are likely to be less resistant to this change than other options.
However, VAT would then be passed onto the consumer, meaning there is more of a social impact for the government and advisers to think about.
