The High Court has ruled in the recent case of Homeserve Membership Limited v HM Revenue & Customs that insurance premium tax (“IPT”) was not payable on an “arrangement and administration” fee which was separately identified to the customer and which was paid under a separate contract with an insurance intermediary.
Under the Finance Act 1994, IPT is charged on payments under taxable insurance contracts. There is, however, an exception for amounts charged under a separate contract which are separately identified in writing to the customer.
Homeserve arranges and administers domestic plumbing and electrical breakdown insurance policies on behalf of insurers. In 2004, it restructured its contractual arrangements; it sent marketing material to its customers explaining that they would have one contract with Homeserve which covered the arrangement and administration of the insurance policy (for which a fee would be charged) and a separate contract of insurance with the insurer.
The Tribunal found that the arrangement and administration fee payable under the contract between the customer and Homeserve was subject to IPT on the basis that it was not economically separate from the insurance contract and therefore did not fall within the exception discussed above. The High Court, however, has allowed Homeserve’s appeal, finding that the phrase “separate contract” had no special meaning. Provided that the contract between the customer and the policy administrator is separate from the contract of insurance with the insurance provider (and provided that the separate amount is identified in writing to the customer), the fee charged under the former contract should not be subject to IPT.
This decision would appear to be welcome news for insurance intermediaries and insurance providers which have made use of similar contractual arrangements. HM Revenue & Customs (“HMRC”) has announced that it will not appeal the High Court’s decision and has stated that claims by businesses which have adopted such structures will be honoured subject to the normal rules. However, it also stated that “where fees are artificially carved out of what would be taxable insurance premium, IPT is properly due” and stated its intention to “close the loophole exposed by the outcome of the Homeserve litigation”. What will now be acceptable to HMRC is far from clear. It is also unclear whether HMRC intends to legislate to reverse the Homeserve decision.
There will be a period of consultation with the insurance industry before the changes to the legislation are announced.