IPT05590 - Calculating the value of the premium: intermediaries: intermediary discounts and fees

IPT05500 explains how the value of premium liable to IPT can be reduced by the insurer offering a discount. Because of their position in negotiating premiums, intermediaries can also offer discounts. Intermediaries are also free to charge fees either in addition or separate to their commission from the insurer. The following are some specific examples of discounts allowed and fees charged by intermediaries and how they affect the premium and the amount of IPT payable.

  • An intermediary retains all the commissions due to them from the insurer and also charges a fee to the insured, under a separate contract from the contract of insurance. The insurer accounts for IPT on the gross premium, inclusive of commission. The fee is not liable to IPT, unless it is charged in relation to an IPT higher rate contract (see IPT06800 on taxable intermediaries), because it is not charged under the taxable insurance contract. However, it may be liable to VAT.
  • An intermediary pays over either a share of, or their entire, commission to the insured (thereby, in effect, offering a discount on the cost of the insurance to the insured). IPT remains due on the full gross premium. This is because the discount is being offered by the broker not the insurer and it is still the gross premium, which includes the full amount of the commission, which is due to the insurer under the contract of insurance.
  • An intermediary pays over a share of, commission to the insured as above. They then charge a fee, which is usually less than the commission would have been, to the insured under a separate contract to the insurance contract - the fee might be for arranging or putting together a bespoke package of insurance cover. Here the insurer accounts for IPT on the gross premium including the commission, but not the fee (again, unless it is charged by a taxable intermediary).

An intermediary or insurer may claim that some or all of the remuneration received by the intermediary for its insurance related services is in respect of a fee charged under a separate contract with the insured, thereby reducing the insurer’s liability to IPT. In reality the otherwise taxable commission payments may have been artificially split to avoid IPT and there is nothing done for the insured under the ‘separate contract’ that is not provided for under the contract of insurance. This is often referred to as ‘premium splitting’ and can be illustrated by the following case.

Policy Administration Services (PAS) [MAN/03/900]

PAS administered the insurance taken out by people who purchased a mobile phone from Phones 4U Limited (PAS and Phones 4U Limited were part of the same corporate Group). PAS had delegated authority from the insurer and was able to agree insurance, issue policy documents etc. A customer purchasing a phone and the insurance completed and signed a form, which contained a statement showing PAS as administrator of the insurance scheme. The customer made one payment which was broken down on the form into an ‘insurance charge’ and ‘administration fee’.

PAS argued that the ‘administration fee’ was for a separate supply of arranging and administering the insurance on behalf of the customer. However, in dismissing their appeal, the Tribunal generally accepted HMRC’s argument that there was one contract between the customer and insurer, which PAS administered. The Tribunal also commented that everything that PAS did, apart from placing the insurance, would normally have been done by the insurer (or a third party on their behalf).

Therefore, unless there is clear evidence of services being provided under a separate contract between the intermediary and the insured, IPT is due on the whole payment received from the customer. Each case should be examined on its merits if premium splitting is suspected. For example, where there is no material change in the services being provided to the insured, or where the insured makes, or continues to make, a single payment under the revised arrangement, or where the insured is entitled to a refund of the whole amount on cancellation of the policy - that is the ‘premium’ and the ‘separate fee’, these could all indicate that the premium has been artificially split as outlined above.

Intermediaries charging fees under separate contracts in relation to insurance contracts liable to the higher rate of IPT are themselves liable to register and account for IPT and so ‘premium splitting’ provides no tax benefit in such cases.

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Homeserve Membership Ltd (Homeserve) [2009] EWHC 1311 (Ch)

This case also considered aspects of calculating the value of the premium. Please refer to IPT05170 to IPT05180 for details.

If you have any doubts about the contractual position of a particular case, please contact the UoE or Deductions & Financial Services Team (see IPT08100) for advice. Please note that it is very important that you establish the current position before any action is taken.

These examples show how IPT is applied. There is also a VAT implication for the charges made for insurance related services, particularly when sold by an agent with goods and services which are liable to VAT at the standard rate (see VATINS7000).