In the Summer Budget, George Osborne announced an increase in Insurance Premium Tax (“IPT”). The rise is substantial – the current rate of 6% will increase to 9.5%. Whilst the Finance Bill 2015-16 is yet to be finalised (its progress can be tracked by clicking here), the current draft provides for changes to take effect from 1 November 2015. It is undoubtedly sensible for practitioners to give this attention as soon as possible as there are costly traps for the unwary, particularly in litigation where After the Event Legal Expenses Insurance (“ATE”) is common. That which follows is intended not as advice, but as a bite size overview of the transitional provisions in order to inform further consideration and reading. Discussing the changes with ATE providers and clients is an essential step.
In brief the transitional provisions will operate as follows: –
- The rules will apply differently depending on the accounting method adopted by each individual insurer. Practitioners arranging ATE policies would be well advised to discuss this matter with their insurers of choice to ensure that they approach the change from the correct starting point;
- If an insurer accounts by cash receipt, the new rate of 9.5% will be applied when payment is made, whether or not the policy was incepted before 1 November 2015. That gives rise to at least two warnings: –
- Where an ATE policy has already been incepted, but the paying party or the client has not yet made payment, practitioners should be careful to ensure that the correct rate is claimed inter partes or charged to the client. Obtaining an updated policy schedule on all outstanding ATE policies which illustrates the correct IPT now payable would be sensible. If that is done, the risk of only claiming/charging 6% is reduced considerably;
- Where a claim for costs (including an ATE premium) has been made and settled inter partes or deducted from the client’s damages, practitioners would be well advised to ensure that they make the appropriate payment to the insurance provider by 31 October 2015 – a failure to do so will result in the higher rate being payable, but practitioners are unlikely to be able to look to their client/the paying party for the shortfall.
- If an insurer accounts by the special accounting method, the new rate of 9.5% does not apply to policies incepted before 1 November 2015 if the premium is paid before 1 March 2016. After that date, the 9.5% rate becomes payable irrespective of the date the the policy was incepted. Thus a policy incepted on 31 October 2015 and paid on 29 February 2016 will still attract 6% IPT, but the same policy which is paid on 1 March 2016 will attract 9.5% IPT;
- The extended period for payment referred to immediately above does not apply to an additional premium which is paid after 1 November 2015 if the premium is in respect of a risk which was not previously covered by the contract. Thus if the scope of the cover or the indemnity limit of a policy incepted before 1 November 2015 is extended after 1 November 2015, the increased rate of 9.5% will be payable on the additional premium associated with the increase irrespective of when that premium is paid.
- Any offer in respect of costs made prior to the changes coming into effect ought to be reviewed in light of the changes as its effect may be diminished. Thought should be given to whether offers already made require clarification. Particular attention should be paid to the wording used in offers going forward.
For clients who have incepted ATE Policies prior to 1 November 2015, practitioners should think about offering their clients the opportunity to pay that ATE premium now rather than wait until they have received damages from which to source funds. If the client chooses to wait they will have to pay the additional 3.5% IPT. If they were not afforded the opportunity to pay whilst the rate is 6%, not only will the client lose more of their damages, but they may have good cause for complaint.
These changes are significant and the transitional provisions varied. Failing to properly advise a client on the impact of the change could result in a significant increase in liability. Practitioners must consider these changes immediately and take appropriate legal/tax advice as necessary.
28 October 2015