Matthew Harman discusses the increase in Insurance Premium Tax (IPT)

From 1 November 2015, the standard rate of IPT will be increased by 3.5 percentage points to 9.5%. From this date all premiums received by insurers using the IPT cash accounting scheme will be charged at 9.5%. For insurers using the special accounting scheme, there will be a 4 month concessionary period that will begin on 1 November 2015 and end on 29 February 2016, during which premiums received that relate to policies entered into before 1 November 2015 will continue to be liable to IPT at 6%. From 1 March 2016 all premiums received by insurers will be taxed at the new rate of 9.5%, regardless of when the policy was entered into.

The above notice was tucked away amidst a whole plethora of announcements in the summer Budget of 2015.   At first blush the announcement looks to be nothing more than an irritant akin to a VAT change.  However, there are significant and worrying implications for lawyers and cost Lawyers alike arising from the wording of the announcement.  The offending wording is ‘From this date all premiums received by insurers using the IPT cash accounting scheme will be charged at 9.5%.’

I am by no means an expert on either insurance or tax but that wording suggests to me that if premiums are paid on policies after 1 November 2015 then the higher IPT applies. The average lawyer will not know whether their insurer uses a cash accounting scheme or a special accounting scheme.  The prudent default, therefore, has to be that any outstanding premiums should be paid up before 1 November 2015 to avoid being penalised a further 3.5%.

Clearly, many policies are payable when the policy is entered into and for those matters I cannot see a problem. However, I do see significant problems with deferred and conditional policies

Having spoken to one of the leading ATE providers I gained a little comfort.  This particular provider makes advance declarations and pays IPT based on figures provided by policy holding lawyers. Effectively staged payment of IPT.  The impact of this is the likelihood of complicated IPT calculations based potentially on 5%, 6% and 9.5%.  However, I am given to understand that this approach has not necessarily been adopted by other insurers.

The concern for lawyers who have ATE policies is that there is a very real danger that they may be suddenly faced with having to pay out an additional 3.5% over and above a calculated premium.

As a Costs Lawyer, I have a number of ongoing cases where the main action has been settled and we are now arguing about costs.  Given the very lengthy delays in obtaining Detailed Assessment hearings from the SCCO I have a number of outstanding matters in which an ATE premium has been claimed using the previous 6% IPT rate.  These bills can date back over a year.  If these are not to settle before 1 November 2015 does this mean that the figures in my bill are now incorrect despite that fact that they were as provided by the insurer at the time the bill was prepared?

The above scenario gives rise to other issues.  On those bills where a hearing date is after 1 November does the paying party have an argument to restrict recovery to a figure based on 6% IPT where the bill is older than, say, three months?  If that argument who is going to pay the difference? Should any pre-existing bill that is yet to settle be amended to reflect the higher IPT figure?

Looking at my diary I see that I have hearings listed after March 2016 in which ATE premiums are claimed. In those cases it seems to me that if the premium has not been paid then it does not matter which system the insurer is using the IPT will be at 9.5%.

So, what can a practitioner do?  The first and obvious suggestion is to ensure that a payment on account of costs is obtained from the paying party and that part of that is used to pay the ATE premium and tax before 1 November.  This also has the benefit of stopping interest running on the premium. The second and most important suggestion is to refer all matters in which a premium has yet to be paid to the insurers and ask them specifically what premium is payable a) before 1 November 2015, between 1 November and 28 February 2016 and thereafter.

By referring the matter to the insurers it becomes their responsibility to ensure that the correct figures are payable.  If the figures then prove to be wrong they will have to meet any shortfall. How this applies to matters that are delayed as above, however, is anyone’s guess.