IPT part 4 - IPT oddities

In the final article in this series, we’ll be looking at why the need to account for IPT at 20% and the need to register for IPT is often missed, and how this risk can be managed.

The relatively straightforward bit is that:

• Travel insurance is always subject to higher rate IPT no matter who arranges it
• Vehicle insurance, except for general motor insurance, is subject to higher rate IPT when the insurance is arranged by a supplier of vehicles (including hire vehicles), or a party connected with a supplier of vehicles
• Insurance sold with domestic appliances is subject to higher rate IPT when the insurance is arranged by a supplier of these items, or a party connected with a supplier of these items

In our experience the main risks arise from insurance being arranged by a party which is connected with the supplier of vehicles or domestic appliances, or from marketing schemes which on the face of it, appear to be innocuous from an IPT perspective, but actually give rise to a higher rate IPT liability.

Taking I Ltd, our insurer from our previous articles:

• I is the majority shareholder in I Ltd.
• I’s wife, I2, is the majority shareholder in Freezy Fridges Limited (FFL), which sells domestic appliances
• I Ltd provides insurance-backed extended warranties in relation to fridges sold by FFL.
• When a customer buys a fridge from FFL, they can also buy an extended warranty. If they do, FFL takes payment, retains its commission and sends the remainder and the customer’s details to I Ltd.

In this case, the premium payable for the extended warranty is subject to IPT at 20% because FFL, a retailer of domestic appliances, has arranged it.

Let’s say though that FFL doesn’t get involved in arranging the I Ltd extended warranties, but rather I Ltd sells the extended warranties via an aggregator website. In addition, I Ltd sells insurance-backed extended warranties relating to laptops sold by Canny Computers Limited (CCL), via the same aggregator website. CCL is an unconnected company which has no part in arranging the extended warranties.

Because I Ltd and CCL are not connected, the extended warranties which relate to CCL’s laptops are subject to IPT at 12%. However, even though FFL doesn’t get involved in the arrangement of insurance relating to FFL’s fridges, because FFL and I Ltd are connected via I and I2, the extended warranties sold in relation to I Ltd’s fridges are subject to IPT at 20%.

Now let’s say that CCL doesn’t get involved in the arrangement of the extended warranties per se, but where they sell a laptop, a leaflet is included in the packaging which details I Ltd’s extended warranty products. The leaflet contains a code which the purchaser enters when they take out an extended warranty via this route – which is how I Ltd can identify that the insurance was sold as a result of the inclusion of the leaflet. For each sale, CCL receives an element of the commission amount which is included in the GWP paid by the customer.

Does this marketing structure mean that CCL is ’arranging’ insurance – thus making the 20% IPT rate applicable? The question of whether any marketing scheme constitutes arranging insurance is a question of fact but even though this scheme is relatively light touch, it would probably mean that the premium payable by the customer would be caught by the 20% IPT rate.

Now let’s say that CCL has decided to branch out and has started selling karaoke machines and arranging insurance-backed extended warranties provided by I Ltd, for any customers who wish to insure the karaoke machine which they’ve purchased.

For their endeavours, CCL doesn’t receive any commission from I Ltd but charges the customer a separate administration fee.

On the assumption that the karaoke machines fall to be treated as ‘domestic appliances’ (more below) the premium payable for the extended warranty is subject to IPT at 20%.

In addition, because the administration fee is an amount which the customer pays in addition to the premium for the extended warranty, this fee is subject to IPT at 20%. In turn, CCL must register for IPT as a ‘taxable intermediary’ and account for this IPT to HMRC.

While the answer to the question of “what are domestic appliances for IPT purposes?” appears to be obvious, the provision is drawn remarkably widely. Nevertheless, although it doesn’t have the force of law, HMRC’s Notice IPT1 provides helpful guidance on the types of items which HMRC will regard as ‘domestic appliances’ as well as a useful though non-exhaustive list of items which in its view, fall within this category.  This list includes some surprising examples, including karaoke machines!

On the face of it, the circumstances in which IPT is due at the higher rate appear to be obvious; however, there are unexpected situations such as those detailed above where the need to apply 20% IPT is not immediately obvious. It is therefore essential to ensure that in any circumstances where higher rate IPT could potentially apply, checks are undertaken to determine whether parties are connected, whether amounts over and above the GWP payable are being received, or whether the insurance relates to slightly unusual domestic items which unexpectedly fall to be treated as ‘domestic appliances’.