Paragraph 2(6) of Schedule 6A, inserted by the Finance Act 1997,
states:
In this paragraph “motor car” and
“motor cycle” have the meaning given
(a) by section 185(1) of the Road Traffic Act 1988 or
(b) in Northern Ireland, by Article 3(1) of the Road Traffic (Northern Ireland) Order1995.
This effectively covers cars, motorcycles and light vans.
Insurance relating to such vehicles is liable to the higher rate
when sold in the circumstances described in
IPT04916. Motor breakdown insurance,
roadside assistance insurance, legal expenses insurance, MOT
insurance and “parts” insurance (such as cover for
tyres) relate to a motor vehicle and are liable to the higher rate
of IPT when provided in these circumstances. Personal accident
insurance which covers the insured in connection with a motor
vehicle, for example whilst driving or whilst getting in or out of
a vehicle, will also be liable to the higher rate of IPT when sold
in these circumstances.
By extra statutory concession (ESC),
“ordinary” motor insurance sold by
motor dealers is not liable to the higher rate of IPT. However if
you discover examples of such motor insurance being used in a VAT
avoidance scheme you should contact the UoE or Financial Services
Team (see
IPT08100). “Ordinary” motor
insurance is the type generally known as fully comprehensive; third
party fire and theft; or, third party.
This ESC
will be formalised into the IPT legislation as part of the
2009 BudgetProcess. Once this is completed, the ESC will be
withdrawn.
Where a policy for ordinary motor insurance contains an
ancillary element of insurance which is liable to the higher rate
when sold by a car dealer (for example, motor breakdown insurance),
the ancillary element is also covered by the concession. What is
“ancillary” is a matter for local officers’
judgment (to give percentage guidelines could lead to manipulation)
but if you are in any doubt you should contact the UoE or Financial
Services Team.
The extra statutory concession, and the legislation that
will replace it, does notapply to “ordinary” motor insurance arranged by
car hire/rental businesses inconnection with a motor vehicle on hire.
For this purpose, the term hire includes short and long term
hire, rental and leasing (but not where the “leasing”
consists of the supply of a vehicle under a finance lease agreement
or a hire purchase agreement).
Credit Protection or Finance GAP insurance is designed to cover any shortfall from the proceeds of a comprehensive motor policy should a vehicle, purchased on finance, be written off. A typical example, linked to a financial agreement, might work as follows.
When the higher rate of IPT was first introduced, it was decided
that it would not apply to this type of GAP insurance. This was on
the basis that the policies could only be sold through motor
dealers in connection with finance arrangements and related to the
finance agreement rather than the motor vehicles.
However another type of GAP insurance, known as
“vehicle replacement” or “back to invoice”
insurance, was introduced onto the market. This new type of GAP
insurance was not tied into any finance arrangements meaning that
any compensation received in the event of a claim could be put to
whatever uses the insured wished (i.e. it did not necessarily have
to be used to pay off any outstanding finance). The non-financial
gap insurance allowed motor dealers greater flexibility in pricing
and lent itself to tax manipulation.
Therefore, from 1 April 2004, non-financial GAP insurance
became liable to the higher rate of IPT when sold through suppliers
of motor vehicles or persons connected to them.
Regardless of what the policy is called, the key is
identifying whether the GAP insurance relates to a financial
agreement or to a motor vehicle. If there is no finance agreement
in place, then premiums paid under the GAP policy will be subject
to the higher rate. Where there is a finance agreement, but the
contract of insurance allows the policy holder flexibility with any
payout, for example if they can decide to put half towards any
outstanding loan and the other half towards the purchase of another
vehicle, then all premiums receivable under the contract are liable
to the higher rate. However, where a contract states that the
policyholder must pay off any outstanding finance then the premiums
are subject to the standard rate. If you have any doubts about the
liability of an insurance contract contact the UoE or Financial
Services Team.
The higher rate applied to premiums received on or after 1
April 2004. For businesses using the special accounting scheme,
this revised treatment applied to premiums written in respect of
annual contracts commencing on or after 1 April 2004.
Suppliers of motor vehicles who charge a separate
insurance-related fee in connection with non-financial gap
insurance, were liable to register as a taxable intermediary and
account for higher rate IPT on their fees with effect from 1 April
2004.
Certain other insurance policies relating to a motor vehicle and arranged or supplied by the person who supplies motor vehicles will also be subject to the higher rate. For example, insurance against accidental damage to the windscreen of a car or “key” insurance. Typically “key” insurance might cover the loss or theft of car keys. As the insurance relates to a motor vehicle it is subject to the higher rate. However, sometimes these policies may also include cover for house keys etc., which would be subject to the standard rate (5%). In those circumstances, the premium should be apportioned.
