Post COVID-19 landscape of insurance tax: Tax policy
October 05, 2020
With the recent announcement of the cancellation of the 2020 Autumn Budget, it is clear that the UK Government has realised that this is not the right time for a full blown budget. But with a sizeable majority and at least four years until the next election, could we, next year, finally see a long-needed overhaul of the UK’s labyrinthine tax system? Brexit, the need to rebalance the economy post-lockdown(s), as well as to deliver on their stated agenda of ‘levelling up’ have all combined to hand the Government the motive and opportunity to shake up tax policy.
But there’s a delicate balance to be struck. The deficit needs to be reduced while encouraging inward investment. Measures aimed to increase the tax burden on corporations and the wealthy will be popular, but spending cuts for the services which have been at the forefront of the crisis will be difficult to sell to the public.
We have already explored tax transparency here, but what changes could we expect to see in tax policy? We look at the economic benefits and implementation ease for some of the most likely options below.
Direct taxes: It’s not all about the rate
There have been rumours of a rise in corporation tax (“CT”) to 24%, but this is unlikely to help plug the deficit. CT contributes less than 10% of tax receipts annually and is currently generating more for the Government at 19% than when higher. Instead, it’s more likely to be coupled with an increase to the tax base. Possibilities are restrictions on use of losses or time limits, which could have a disproportionate impact on parts of the insurance sector with fluctuating long term profit patterns, e.g. life insurance, where there is reliance on offsetting historical trading losses against long term profits.
Another possibility is simplifying national insurance contributions (“NIC”s) and income tax, for example bringing self-employed NICs in line with those for employees or expanding the existing bands. Following the extension of the furlough scheme, this may be the opportune moment to act. In addition to being a progressive tax, which is politically important for the Government, changes would be simple and cost-effective to implement due to PAYE systems.
So what about new or industry-specific taxes? The biggest concern for the insurance industry would be a new tax similar to the bank levy, based on gross written premiums or balance sheet capital. The industry should, where possible, publicise the role it plays in paying and collecting taxes and it's already broad taxation, i.e. specific rules for life and Lloyd’s insurers.
Lockdown has further raised the profile of the digital economy - and the public consensus for increasing tax here. Insurance businesses should pay attention to developments on replacing the Digital Services Tax with the OECD BEPS 2.0 Pillar 1 and 2 proposals. Pillar 2 in particular does not have a carve out for the insurance industry and could instead unnecessarily increase the tax administration burden while also adding material tax liabilities around the world.
Indirect taxes: Insurance premium tax (“IPT”) a more likely target than VAT
As a regressive tax, increasing VAT could be politically expensive. But VAT receipts are sizeable, so any cut in the rate would be unlikely to have a net benefit. Instead, despite campaigning from industry bodies, IPT could rise further towards alignment with VAT. Rate changes are easy for HMRC to implement and it would be steady income given consumers are required to have certain insurance policies in place to protect themselves and their assets.
Brexit is another factor here, due to current VAT exemptions being conferred by the EU VAT Directives, there is a risk of certain exemptions being removed or curtailed once the UK is no longer bound by the Directives.