Insurance Premium Tax: Treatment Of Brokers' Fees

A recent case has demonstrated that it is possible to have a

separate contract for the administration of an insurance policy

that does not attract IPT, as long as it is sufficiently separate

to the main insurance contract.

Homeserve, an insurance intermediary, arranged and administered

cover for domestic emergency and call out repairs such as plumbing

and drainage. Homeserve negotiated the cover with an insurer,

offered the insurance-backed scheme to homeowners and, if it was

taken up, administered the service. The homeowner was told in the

marketing and contractual documents that they had two contracts,

one with Homeserve for which the cost was £14 (part of a

total payment of £59.99) and a separate contract with the

insurer. The homeowner paid the total to Homeserve who retained

£14 and paid the balance to the insurer. IPT was payable on

the premium and the question was whether it was also payable on the

admin fee retained by Homeserve.

The VAT and Duties Tribunal had held that IPT was payable: the

arrangement gave rise to a contract between Homeserve and the

homeowner that was not separate from the insurance contract for the

purposes of IPT. Although Homeserve had taken pains to separate the

contracts in the arrangements with the homeowner, the Tribunal

ruled that the contract between Homeserve and the homeowner was

dependent on and inseparable from the insurance contract and was

not therefore separate from it.

On appeal, the High Court disagreed and held that it is possible

to have a separate contract in these circumstances. The use of the

words "separate contract" in the relevant IPT legislation

meant no more and no less than a contract which is distinct from

(in the sense that it is not the same as) the contract of

insurance. Although made "in connection with" a taxable

insurance contract, the contract for administration was a separate

contract and the administration fee was exempt from IPT.

Comment

The decision, which may not be the final say if this matter is

appealed to the Court of Appeal, will be welcomed by insurance

brokers as it provides clarification on the question of when fees

paid to brokers are exempt from IPT. The fact that a fee is paid as

part of a single payment by the insured (which also includes the

net premium for which the broker accounts to the insurer) will not

necessarily mean that the whole sum is liable to IPT. Many brokers

are already operating on a separate fee rather than brokerage

basis, and this decision...