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Paying a premium: The continued rise of Insurance Premium Tax

Of all the measures the government could take in 2017 to improve the performance of the UK construction industry, reversing the recent hikes in Insurance Premium Tax is among the most important.

If, as expected, the government raises the level of Insurance Premium Tax (IPT) again to 12 per cent in June, it will be the third increase since November 2015.

In that time the rate of IPT, which is a tax paid on all insurance premiums, will have doubled from six per cent to 12 per cent.

Much of the emphasis in the national press has been on consumers facing higher bills for home, car, pet and buildings insurance.

But less has been said about the impact on businesses – and the construction industry is set to be hit harder than most.

Raising concerns

In a survey of Gordons’ key clients in the construction sector earlier this year, reversing the recent hikes in Insurance Premium Tax was highlighted as one of the main things government could do to support the performance of construction companies.

And our clients are not the only ones raising concerns.

In February, the Federation of Master Builders warned that another increase in IPT would punish small construction companies that play by the rules, further encouraging the rise of cowboy builders by increasing the gap in prices.

Of course, construction insurances are a necessary part of our industry, in many cases a requirement of the contract being awarded.

From contract works insurance to legal indemnity, not to mention the relevant policies a construction company must take out on their own staff, premises and equipment, it all adds up – especially for SMEs.

Small firms affected

UK construction companies pay a significant amount each month to cover all the necessary insurances and it is easy to see the impact of higher IPT, particularly on smaller firms.

The government, in its defence, still maintains that IPT is a tax on the insurance company, not the policy holder - but the rising cost of insurance premiums says otherwise.

To quote James Dalton from the Association of British Insurers: “IPT is a tax on businesses, especially SMEs that often operate on very tight margins and that do the right thing by purchasing insurance to help manage their risks.

“At a time of continued economic uncertainty, with many firms facing increasing costs, the last thing they need is a further hike in IPT.”

Next steps

So where do we go from here? As it stands, the industry is bracing itself for another rise in June, from the current 10 per cent rate to 12 per cent.

This was announced by chancellor Philip Hammond in the Autumn Statement last November, although there has been no further announcement since.

The insurance industry has been lobbying hard, as have organisations like the FMB as they seek to protect the profits of their members.

Some insurers have predicted that IPT will ultimately align with the UK’s 20 per cent VAT rate, which means we have more increases to come – although Mr Hammond did not reveal any further planned rises in the recent Budget.

For now, all eyes are on June 1.

Anjon Mallik is a partner at Gordons

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