There has been a long-running debate as to whether Insurance Premium Tax (IPT) is chargeable on fees which are not payable under the main insurance contract. The IPT Tribunal recently held that such fees should be charged, Dominic Stuttaford examines this decision.
The starting point in this debate is that, where an amount is charged to the insured by any person in connection with a taxable insurance contract, any payment in respect of that amount is to be regarded as a payment received under that contract by the insurer. However, an amount will not be chargeable to IPT where such amount is charged under a separate contract and is identified to the insured as a separate amount so charged (section 72(1A)(b) Finance Act 1994).
The Insurance Premium Tax Tribunal has recently considered (in Homeserve GB Limited v HMRC), whether an arrangement and administration fee paid by a policyholder on entering into a taxable insurance contract formed part of the premium on which IPT was chargeable or was a separate fee charged under a separate contract and consequently not subject to IPT.
As the Tribunal concluded that the separate administration fee was chargeable to IPT, this decision is of great importance to anyone who may have entered into similar arrangements. While it is likely to be appealed, parties should consider whether there are any protective measures they should take.
Homeserve GB Limited was an insurance intermediary specialising in insurance schemes for homeowners. Homeserve acted as an insurance broker for Partner Assistance SA (IPA), the underwriter of the policies, and arranged and administered the policies on behalf of IPA. The policies were sold through an arrangement which was intended to fall within section 72(1A)(b).
Under the arrangement, upon taking out a policy, a policyholder would pay two different amounts: £14 in respect of the arrangement and administration of the policy by Homeserve (the fee in question) and a sum in respect of the policy premium. Policyholders also entered into two contracts: one with Homeserve for the arranging and administration services for which the fee was charged (the Consumer Contract); the second with IPA in respect of the policy itself (the Insurance Contract).
This “dual contract” arrangement was reflected in both the terms and conditions of the policies and the marketing material sent to prospective policyholders by Homeserve to promote them.
The Tribunal’s decision
As there was no dispute that the fee was charged to the policyholder “in connection with” the Insurance Contract, the main question for the Tribunal to determine was whether the fee was taken out of the charge to IPT by section 72(1A)(b) as being an amount “charged under a separate contract”.
The Tribunal concluded that the Customer Contract was separate to the Insurance Contract: Homeserve was assuming obligations as principal to the policyholder. If IPA failed to fulfil a number of obligations to a policyholder, Homeserve was contractually bound (under the Consumer Contract) to honour them. Furthermore, the various documents relating to the Customer Contract repeatedly stressed the existence of a “separate contract”; it was therefore hard to escape the inference that this was what the parties intended.
However, despite holding that the Customer Contract dealing with the arrangement and administration was for contract law purposes regarded as “separate” from the Insurance Contract, the tribunal decided that in the context of section 72(1A)(b), the expression “separate contract” had a special meaning: the contracts had in economic and commercial terms to be separate.
The Tribunal did not consider that this was the case: the Customer Contract was, at the time of its creation, dependent on and inseparable from the insurance element; the Tribunal was therefore satisfied that the fee did not fall within the exclusion in section 72(1A)(b). In finding against Homeserve on this point, the Tribunal in particular focused on the fact that, first, the price quoted to a prospective policyholder was a single price, and secondly, a policyholder’s right to cancel within 28 days and obtain a full refund resulted in the repayment of both the fee and the balance of the premium.
Given the effort which Homeserve and IPA took to ensure that there was a clear delineation between the two contracts in respect of the fee and the premium, this decision could be said to be harsh. It is likely to be argued in any appeal that there is no special meaning to the term “separate”. The Policyholder contracted with two separate legal entities and to hold that they were not separate is stretching the language of the statute. However, it does illustrate the growing trend of the tax tribunals and the courts to look beyond the strict wording of a provision in the quest for a purposive interpretation of statutes.
Any insurer with similar arrangements should be considering how they are affected by this decision. As the insurer, they are likely to have the obligation to account for any IPT due and any interest and penalties, but in many cases, they will not have the requisite information to calculate the amount due. Insurers should consider whether, if the courts do decide the matter in HMRC’s favour, they have any right of recovery against any third party for the tax due, and if necessary, consider taking protective measures to preserve those rights. This will involve in part collecting the relevant information, working out their exposure and notifying the appropriate party, and in some circumstances HMRC.
If the arrangements are still in place, they should look at them closely and determine in light of the judgment how robust they are. It is very likely that the case will be appealed to the High Court (and beyond) and so the final outcome may be some time off.