Insurance · 2 June 2017

Insurance premium tax hike threatens to stymie small business

Flood insurance protection
The tax rise could prevent small firms from buying vital cover like flood insurance

Small businesses have called on the next government to commit to no further hikes to the Insurance Premium Tax (IPT) in the next parliament, after the government increased the levy from ten per cent to 12 per cent on 1 June.

The latest increase means the IPT rate has doubled in the last five years, and the Federation of Small Business (FSB) has warned that the knock-on effect will be to damage small firms, for which the costs of doing business continue to grow.

The FSB’s national chairman, Mike Cherry, said that the rise in IPT would discourage small business owners from taking out insurance policies for premises, vehicles and employee health, for example. “If insurance premiums continue to increase, small business take-up of insurance will dip, and it will be those most at risk that will be affected.

“Having absorbed a recent rise in the National Living Wage and a business rates revaluation, there will no doubt be many small firms thinking twice about taking out insurance policies as a result of this tax grab.”

The IPT is a percentage tax on insurance policy premiums, meaning it bears most heavily on those with the most expensive policies. Technically a tax on insurance companies rather than their customers, the IPT has been used by successive recent chancellors as an alluring way to raise funds. Once IPT is increased, insurers invariably pass the tax on to consumers.

Cherry added: “This increase affects all policies, including vital lifelines such as income protection insurance, vehicle insurance and flood insurance. Unlike VAT, small firms cannot claim back the cost of IPT.

“This poorly thought through tax rise discourages good behaviour and is yet another hidden cost keeping our entrepreneurs awake at night. The next government should promise no further hikes in IPT for the new parliament.”

According to indirect tax director at advisors RSM, Justine McInnes, the UK may in future introduce a system of different IPT rates for different insurance classes in line with countries like France and Germany. “This could affect the extent to which the increased IPT cost is passed on to the insured,” said McInnes.

“Given the [IPT] rate is still relatively low compared to some other key EU countries, it is likely to continue to increase further over time.”

FSB calls on government to up game on flood defence

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.