Solicitors need to understand the impact of the imminent increase in insurance premium tax (IPT) on after-the-event (ATE) insurance if they want to avoid being held pursued for any shortfall, a leading broker has warned.
IPT goes up from 6% to 9.5% on 1 November and Martin Doyle, a director of Amberis, warned that failing to deduct and pay the correct amount of IPT thereafter is likely to result in insurers coming back to the solicitor for the balance.
“On large multi-track cases this could be a significant amount in light of the 3.5% increase but if handled incorrectly on volume business the effect could be equally costly.”
Clients taking out ATE also need to be made aware of how will affect what is taken from their damages, he added.
Mr Doyle explained that ATE insurers use of one of two different accounting methods and IPT collection is treated differently in each case.
The first is the cash receipt method, which means that any premium received after 1 November attracts IPT at the increased rate of 9.5% irrespective of the inception date of the policy.
The second is the special accounting method, which means that premiums attract IPT at the prevailing rate when the policy was issued, so anything prior to 1 November is payable at a rate of 6%. However, this only applies until 1 March 2016, after which the rate of 9.5% applies.
Mr Doyle said: “If you have premiums that have been collected from defendants and/or claimants but have not been paid over to insurers and the cash receipt method applies, these should be paid prior to 1 November to avoid additional costs.
“If you pay premiums monthly in arrears as part of a delegated authority arrangement, it is important that every premium collected prior to 1 November is paid to insurers in November to ensure that the lower rate applies. The trigger point for the payment of the increased IPT is the date the premium is deducted from the policyholder’s damages. So before 1 November, 6% applies; after it’s 9.5%.”
He said that whichever applies, “it is highly unlikely that any insurer will want to stomach the bill from HMRC in respect of underpaid IPT, especially post-LASPO where premium income has been reduced considerably”. Insurers and/or intermediaries should be telling solicitors how they intend to deal with the change.
For pre-LASPO cases, with the defendant paying the premium, “it is imperative that the correct policy certificate is sent when costs are submitted on successful cases”, Mr Doyle added.
“This will either mean requesting a new certificate from insurers or obtaining a letter from them detailing the impact of the increase on the premium due.”