New Chancellor, Rishi Sunak, is set to crack down on £340m loopholes in insurance tax
- New Chancellor to stop insurance tax loopholes thought to cost £340m a year
- Some insurance policies are adding a tax of 20 per cent to their premiums
- Other insurers were said to be failing to report all of their taxable premiums
New Chancellor Rishi Sunak may use his first Budget to slam shut insurance tax loopholes thought to be costing the Treasury more than £340million a year.
The Mail on Sunday understands that Ministers are determined to take action to stop a huge loss of revenue from the insurance premium tax.
Insurers are supposed to add 12 per cent tax to the premiums they charge customers who take out car, home and pet policies. Some insurances – such as travel policies – attract a tax of 20 per cent.
Insurance premium tax is not charged on life assurance or similar long-term savings products. Insurance of commercial ships and aircraft is also exempt.
Decision time: New Chancellor Rishi Sunak may use his first Budget to slam shut insurance tax loopholes
The money collected is supposed to be handed over to HM Revenue & Customs and in most cases insurers abide by the rules.
However, a report from HMRC last year spoke of ‘unfair’ practices and suggested ways of preventing abuse of the system.
Some insurers were said to be failing to report all of their taxable premiums, while others are known to have neglected to register to pay insurance premium tax in the first place.
HMRC has said it has no specific figures for the shortfall of insurance tax revenues, but its estimate of the ‘tax gap’ for the UK as a whole is 5.6 per cent.
In 2018-2019, insurance premium tax receipts totalled £6.19billion, implying an annual loss to the public purse of more than £340million.
The Treasury declined to comment on whether a crackdown would be announced in the Budget, which is due to be delivered on March 11.
Action to stem the loss of tax revenue could include forcing people who buy insurance through price comparison websites to cover any shortfall.
HMRC is examining the way that insurers have shifted from paying brokers by commission to charging separate fees to their customers.
Insurance premium tax is currently levied on commissions but not on fees, meaning the tax can be avoided.
HMRC suggested extending insurance premium tax to cover such fees.
Another area of concern relates to the information about premiums that is provided to HMRC by insurers.
There is no requirement for insurers to report any business they consider to be exempt from insurance premium tax.
HMRC is also worried about insurers operating in the UK but located overseas for tax purposes in jurisdictions ‘which can lack transparency’.
One solution would be to bring in a requirement for such insurers to identify their ultimate parent company.
Insurers which are not registered for UK insurance premium tax continue to be used to insure UK risk, but HMRC concludes: ‘At present there is little that can be done to prevent this.’
HMRC points out that there is no way for brokers or consumers to check whether an insurer is registered for insurance premium tax and suggests the establishment of a public register.
That suggestion raises the possibility of making anyone who buys car, home or pet cover from an unregistered insurer liable for the unpaid tax.