Insurance Premium Tax, or IPT as it is commonly known, is a premium received under taxable insurance contracts. DragonDMS will calculate the IPT correctly when you enter both the cost and selling price.
Rate bands
There are two rate bands where IPT is concerned:
1. The standard rate of 12% (Any changes are automatically updated in DragonDMS)
2. The higher rate of 20% for insurance supplied with selected goods and services
Higher rate
The higher rate of IPT applies to insurance sales in three trading sectors where insurance is sold in relation to goods and services which are subject to VAT:
1. Sales of motor cars, light vans or motor cycles
2. Sales of electrical or mechanical domestic appliances
3. Sales of travel insurance
Motor vehicles
The higher rate of IPT will apply to an insurance premium relating to a motor car or motor cycle if the contract is arranged through or supplied by:
1. A supplier of motor cars or motor cycles
2. A person connected to a supplier of motor cars or motor cycles, where the insurance relates to a motor vehicle provided by the connected supplier
3. A person who pays, to a person described in points 1 or 2, a fee relating to an insurance contract covering the motor vehicle
Scenarios
There are three scenarios regarding IPT and the sale of insurance premiums by motor traders.
Free insurance premium
When the motor trader sells the insurance premium free of charge, the customer pays no IPT. The supplier of the premium recovers the standard rate of IPT from the motor trader.
Example:
Selling price to customer = £0.00
IPT to customer = £0.00
Cost price to trader = £100.00
IPT to trader = £12
Discounted premium
If the motor trader sells the premium at any price lower than the cost from the insurer but higher than zero, the customer is charged IPT at the higher 20% rate. The insurer will also recover IPT at 12% on the difference in the sold price and the cost price to the trader.
Example
Selling price to customer = £50.00
IPT to customer = £10.00 (20%)
Cost price to trader = £100.00 (£50 difference)
IPT to trader = £6 (12% from difference)
Total IPT = £16
Full price or higher premium
If the motor trader sells the premium for the same or higher than the cost from the insurer, his customer is charged IPT at 20% (higher rate). The insurer will recover IPT at 20% of the total selling price of the premium to the motor trader’s customer.
Example
Selling price to customer = £150.00
IPT to customer = £30.00 (20%)
Cost to trader = £100.00
IPT to trader = £30.00 (The insurer will recover IPT at 20% of the total selling price the customer paid)