The UK Government made nearly £6 billion in income from Insurance Premium Tax (IPT) for the year 2017/2018 – an increase of up to 22% on the £4.88bn it collected the previous year.
This upsurge is severely affecting businesses and consumers alike, and poses risks to the overall economy.
As announced in its Autumn Budget Statement 2016, the government increased the IPT rate from 10% to 12%, to fund a series of measures such as improving the country’s infrastructure and its citizens’ lives.
During his speech Chancellor of the Exchequer, Philip Hammond said “In order to raise revenue, which is required to fund the spending commitments I am making today, it [IPT] will rise from 10% currently, to 12% from next June.”
Hammond minimised the impacts and forecasted that IPT would raise £680 million in tax revenue for 2017/18. However, the latest data revealed total receipts of almost £1 billion, being a 47% difference from forecasts.
One of the main reasons, driving the higher than expected tax revenue, is that businesses are impelled into taking out more insurance policies than in the past. This has meant that businesses are being hit twice when combined with the IPT increase.
In addition to compulsory policies such as employers’ liability insurance, businesses face new threats like cybercrime, social media, and regulations that they have little choice but to insure against.
Cybercrime is becoming an increasingly important risk for businesses. A Financial Times and ICSA survey showed that 72% of FTSE 350 companies consider cyber-attacks their biggest concern, and 88% are currently increasing spending on cyber-risk reduction.
One problem faced by businesses is that cyber insurance costs can be high due to the evolving complexity of cyber risks and the lack of historical data, besides the fear that insurers won’t pay.
When the National Bank of Blacksburg lost $2.4 million (£1.7m) between 2016 and 2017 because of hacking attacks, the bank relied on its $8 million insurance policy from Everest National Insurance. However, the bank was offered a mere $50,000.
Another threat is the growing regulations environment imposed on companies. Despite voting to leave the European Union, the UK still has to comply while being part of the Union. The latest regulation is the General Data Protection Regulation (GDPR) which overhauled how businesses process and handle data.
Companies breaching the GDPR will face penalties of up to €20 million (£17.5m) or 4% of global turnover, whichever is highest. This might be that the costs of professional indemnity insurance increases, as companies are pursued more frequently for failing to appropriately manage their clients’ data.
The new and existing threats both contribute to the increase in government tax revenue which the Treasury is fortunately benefitting more than they had originally expected.
Divisive new tax
Initially when introduced in 1994, the insurance premium tax rate was only 2.5%. The UK government introduced the tax simply to raise revenue from the insurance industry, which was viewed as undertaxed and not subjected to VAT (Value Added Tax).
Former Chancellor Kenneth Clarke, who announced the tax in the November 1993 Budget said: “I have never disguised my personal view that the coverage of value added tax in this country is too narrow.”
The UK is not the only government introducing the tax. Many EU members have used it to increase their revenue too.
However, successive government changes have resulted in the current rate of 12%, and these increases have created many criticisms.
The British Insurance Brokers’ Association (BIBA) has reiterated its view that the rate should be reduced, and described the IPT as a regressive tax. In its budget submission to HM Treasury, BIBA described two negative effects: an increase in the number of claims by uninsured drivers of 10%, and the serious impact that the IPT has on floods, particularly for those living or operating in high-risk areas.
Graeme Trudgill, BIBA Executive Director called for freezing the IPT “No more increases, they’ve gone too far,”
BIBA concluded that IPT may be an important tax contribution to the government, but seriously misses the effect on insurance take-up.