FINANCE BILL

CLAUSE 21: INSURANCE PREMIUM TAX : NEW RATES OF TAX

INTRODUCTION

1. This clause introduces two rates of insurance premium tax. With effect from 1 April 1997 the existing single rate of 2.5 per cent will be replaced with a standard rate of 4 per cent, and a selective higher rate of 17.5 per cent.

DETAILS OF THE CLAUSE

2. Subsection (1) provides that tax will be charged at 17.5 per cent on premiums which are liable to tax at the higher rate and at 4 per cent on premiums which are liable to tax at the standard rate.

3. Subsection (2) amends section 73(1) of the Finance Act 1994 to provide that references in the Act to "the higher rate" are construed to mean that premiums liable at that rate are liable to Insurance Premium Tax at 17.5 per cent, and that references in the Act to "the standard rate" are construed to mean that premiums liable at that rate are liable to Insurance Premium Tax at 4 per cent.

BACKGROUND

4. The higher rate of Insurance Premium Tax is being introduced to address the issue of revenue lost when suppliers of goods and services liable to VAT also provide insurance (for example, mechanical breakdown insurance for a television) and inflate the margin on the exempt insurance rather than on the goods and services which are liable to VAT.

CLAUSE 22: INSURANCE PREMIUM TAX : PREMIUMS WHICH ARE LIABLE TO TAX AT THE HIGHER RATE

INTRODUCTION

1. This clause and Schedule 4 describe those premiums liable at the new higher rate and provides that Schedule 4 will become Schedule 6A of the 1994 Finance Act.

2. From 1 April 1997 there will be two positive rates of Insurance Premium Tax. Insurers writing taxable premiums will need to identify the rate at which those premiums are liable to tax.

DETAILS OF THE CLAUSE

3. Subsection (1) provides that a premium received under a taxable insurance contract by an insurer will be liable to tax at the higher rate if it falls within the description of higher rate contracts in Schedule 6A of the Finance Act 1994. It provides that Schedule 6A shall be interpreted according to the interpretation section in Part 1 of that Schedule and empowers the Treasury by order to vary the definition of a taxable insurance contract which is subject to the higher rate to cause contracts which would not otherwise be liable to tax at the higher rate to become so, or vice versa. It also provides that this clause shall have effect subject to section 69 of the Finance Act 1994 (apportionment of premiums).

4. Subsection (2) amends section 74 of the Finance Act 1994 to provide that

(a) an order amending the definition of premiums which are subject to the higher rate (under clause 22), shall be laid before the House of Commons and unless approved within 28 days shall cease to have effect at the end of that time; and (b) that any other statutory instrument shall be annulled by a resolution of the House of Commons.

5. Subsection (3) provides that Schedule 6A shall be inserted after Schedule 6 to the Finance Act 1994.

4. Paragraph 1, sub-paragraph(1) defines the terms "insurance related service"; "supply"; and "supplier".

5. Sub-paragraph (2) provides that the definition of connected person, for the purposes of this Schedule, is to be determined in accordance with section 839 of the Taxes Act 1988.

6. Paragraph 2, sub-paragraph (1) provides that a premium relating to a motor car or motor cycle falls within this paragraph if

(a) the contract is arranged through a person falling within sub-paragraph (2) of paragraph 2; or

(b) the insurer is a person falling within that sub-paragraph.

(Insurance provided free to the insured is excluded from the scope of the higher rate.)

7. Sub-paragraph (2) describes the persons referred to in sub-paragraph (1) above as:

(a) a supplier of motor cars or motor cycles;

(b) a person connected to a supplier of motor cars or motor cycles; or

(c) a person who pays a commission or fee relating to the insurance contract covering a motor car or motor cycle to a person described in (a) or (b) above.

8. Subparagraph (3) provides that where a taxable insurance contract relating to a motor car or motor cycle is arranged through a person who is connected to a supplier of motor cars or motor cycles, the premium will only be liable to the higher rate of Insurance Premium tax if it covers a risk relating to a car or motor cycle supplied by the person to whom the insurance intermediary is connected.

9. Subparagraph (4) provides that where the insurer underwriting a taxable insurance contract which relates to a motor car or motor cycle is connected to a supplier of motor cars or motor cycles the premium will only be liable to the higher rate of Insurance Premium Tax if it covers a risk relating to a car or motor cycle supplied by the person to whom the insurer is connected.

10. Subparagraph (5) defines the circumstances in which, for the purposes of this paragraph, insurance is to be treated as provided free of charge to the insured.

11. Subparagraph (6) defines the terms "motor car", "motor cycle" and "supplier"..

12. Paragraph 3, Subparagraph (1) provides that a premium relating to relevant goods falls within this paragraph if:

(a) the contract is arranged through a person falling within subparagraph (2); or

(b) the insurer is a person falling within that subparagraph

(Insurance provided free to the insured is excluded from the scope of the higher rate.)

13. Subparagraph (2) describes the persons referred to in subparagraph (1) above as:

(a) a supplier of relevant goods;

(b) a person connected to a supplier of relevant goods; or

(c) a person who pays a commission or fee relating to a contract for relevant goods to a person described in (a) or (b) above.

14. Subparagraph (3) provides that where a taxable insurance contract relating to relevant goods is arranged through a person who is connected to a supplier of relevant goods, the premium will only be liable to the higher rate of Insurance Premium Tax if it covers a risk relating to relevant goods supplied by the supplier of relevant goods to whom the insurance intermediary is connected.

15. Subparagraph (4) provides that where the insurer underwriting a taxable insurance contract which relates to relevant goods is connected to a supplier of relevant goods the premium will only be liable to the higher rate of Insurance Premium Tax if it covers a risk relating to relevant goods supplied by the person to whom the insurer is connected.

16. Subparagraph (5) defines the circumstances in which, for the purposes of this paragraph, insurance is to be treated as provided free of charge to the insured.

17. Subparagraph (6) defines the term "relevant goods" and "supplier".

18. Subparagraph (7) defines the terms "appliance" and "the home".

19. Paragraph 4, subparagraph (1) provides that a premium relating to travel risks falls within this paragraph if:

(a) the contract is arranged through a person falling within subparagraph (2); or

(b) the insurer is a person falling within that subparagraph.

(Insurance provided free to the insured is excluded from the scope of the higher rate.)

20. Subparagraph (2) describes the persons referred to in subparagraph (1) above as:

(a) a tour operator or travel agent;

(b) a person connected to a tour operator or travel agent; or

21. Subparagraph (3) provides that where a contract relating to travel risks is arranged through a person who is connected with a tour operator or travel agent the premium will only be liable to the higher rate of Insurance Premium Tax if it covers a risk which relates to services supplied by the tour operator or travel agent with whom the person arranging the insurance is connected.

22. Subparagraph (4) provides that where the insurer underwriting a contract relating to travel risks is connected with a tour operator or travel agent the premium will only be liable to the higher rate of Insurance Premium Tax if it covers a risk which relates to services supplied by the tour operator or travel agent with whom the insurer is connected.

23. Subparagraph (5) provides that for the purposes of subparagraphs 3 and 4 above a travel agent is treated as the supplier of the services that he arranges.

24 Subparagraph (6) defines the circumstances in which, for the purposes of this paragraph, insurance is to be treated as provided free of charge to the insured.

25. Subparagraph (7) defines the terms "tour operator", "travel agent" and "travel risks".

BACKGROUND

26. Suppliers of goods and services which are liable to VAT often arrange insurance (which is exempt from VAT) for some of their customers. Such suppliers often take a disproportionate margin on the insurance, rather than the taxable goods or services. This may well be for commercial and fiscal reasons. Whatever the primary motive, however, the result is a tax revenue loss, and often a distortion of trade. The introduction of the higher rate will remove the tax advantage in the disproportionate margins.

27. Insurance relating to cars and arranged by suppliers of motor cars, insurance relating to domestic appliances and arranged by suppliers of such appliances and insurance relating to travel risks arranged by travel agents or tour operators is liable to IPT at the higher rate.

28. The higher rate also extends to such insurance provided through or by persons connected to these suppliers.

29. Similarly the higher rate will also apply to such insurance arranged by or supplied by someone who passes a fee or commission relating to such insurance to one of these suppliers or someone connected to such a supplier.

These provisions are necessary to counter avoidance of Insurance Premium Tax at the higher rate.

30. However, to ensure that these anti avoidance measures are targeted as tightly as possible, insurance arranged through an agent connected to (for example) a supplier of relevant goods, or provided by an insurer connected to such a supplier is liable to Insurance Premium Tax at the higher rate only where it relates to goods or services sold by the connected supplier. Customs and Excise plan to issue a Statement of Practice which will elaborate on how this provision is to be administered.

31. Where a contract is liable to the higher rate and to other rates of IPT it may be apportioned so that tax at the higher rate need be brought to account only on that element which is liable to the higher rate.

CLAUSE 23 : INSURANCE PREMIUM TAX : REDUCED CHARGEABLE AMOUNT

INTRODUCTION

1. This clause provides for the apportionment of the premium when cover is provided for matters which are taxable at different rates of insurance premium tax, or for matters which are both taxable and exempt.

2. This ensures that, in these circumstances, tax is only charged at the appropriate rate on that proportion of the premium which relates to non exempt matters.

DETAILS OF THE CLAUSE

3. Subsection (1) provides that this Clause shall apply where it is necessary to apportion a premium which covers matters which are taxable at different rates of Insurance Premium Tax or matters which are both taxable (possibly at different rates) and exempt.

4. Subsection (2) defines the "non-exempt premium" for the purposes of this Clause.

5. Subsection (3) provides that the chargeable amount is, with the addition of any tax chargeable (whether that be at the higher rate or at the standard rate) equal to the amount of the non exempt premium as defined in subsection (2).

6. Subsection (4) provides that if a contract relates to matters liable to Insurance Premium Tax at both the standard rate and the higher rate, the elements liable at the different rates are identified according to the following subsections.

7. Subsection (5) provides that "the higher rate element" is that part of the non exempt premium which relates to a matter which is subject to tax at the higher rate (including tax at the higher rate), and that "the

standard rate element" is the difference between the non-exempt premium (as defined in sub-section (2)) and the higher rate element.

8. Subsection (6) provides that where a premium relates to a contract which falls within the description of an insurance contract in subsection (4) above the amount of tax due on that premium shall be the aggregate of tax due on the standard rate chargeable amount and tax due on the higher rate chargeable amount.

9. Subsection (7) defines "the higher rate chargeable amount" and "the standard rate chargeable" amount for the purposes of this clause.

10 Subsection (8) provides that where a premium relates to a contract which falls within the description of an insurance contract at subsection (4) references to the chargeable amount shall be taken as referring separately to the standard rate chargeable amount and the higher rate chargeable amount.

11. Subsection (9) provides that, in determining what amount of a premium relates to exempt matters (according to subsection 2(b) above), any part of the premium which has been referred to as tax may not be treated as attributable to the exempt element of the premium. This applies notwithstanding the fact that this may mean that a different amount of tax is payable in respect of this premium than that which is actually due.

12. Subsection (10) provides that, in determining what amount of the premium relates to the higher rate element (in accordance with Subsection 5(a) above) any part of the premium which has been referred to as tax due on the higher rate chargeable amount shall be taken as being wholly attributable to the higher rate element of the premium. This applies notwithstanding the fact that this may mean that a different amount of tax is payable in respect of this contract than that which is actually due.

13. Subsection (11) provides that, subject to the provisions outlined in Subsections 9 and 10 above, any attributions made under Subsections 2(b) and 5(a) above must be done on a just and reasonable basis.

14. Subsection (12) defines "an exempt matter", a "non exempt matter", a "standard rate matter" and a "higher rate matter" for the purposes of this Clause.

15. Subsection (13) provides that if a contract relates to both a lifeboat and lifeboat equipment it shall be treated as relating to an exempt matter for the purposes of this section.

16. Subsection (14) defines "lifeboat" and "lifeboat equipment" for the purposes of this section.

17. Sub-clause 2 provides that section 50 of the Finance Act 1994 (chargeable amount) be amended so that subsections 50(1) and(2) have effect subject to this clause.

BACKGROUND

18. This clause replaces section 69 of the Finance Act 1994 (which allows premiums which relate to taxable and exempt risks to be apportioned, but which was not designed to cope with more than one positive rate of tax). Like the section it replaces it gives only general guidelines about apportionment, rather than prescriptive formulae. The key requirement is that any apportionment must be done on a just and reasonable basis.

CLAUSE 24:INSURANCE PREMIUM TAX : COMMENCEMENT OF CLAUSES 21 TO 23

INTRODUCTION

1. This clause provides for new rates of insurance premium tax to be effective from 1 April 1997. However, it allows for a concessionary period during which certain premiums will be taxed at the old rate. It also invokes provisions in clause 29 designed to prevent tax avoidance by forestalling.

DETAILS OF THE CLAUSE

3. Subsection (1) provides that the rate of 4 per cent or 17.5 per cent (as appropriate) will apply to taxable insurance premiums which fall to be regarded as received under a taxable insurance contract by an insurer on or after 1 April 1997.

4. Subsection (2) provides that, for insurers using the special accounting scheme to account for the tax, a premium may be taxed at the old rate (2.5 per cent) where it (a) relates to a contract which was made before 1 April 1997 and (b) is treated under the terms of the special accounting scheme as received by the insurer before 1 August 1997.

5. Subsection (3) provides that the benefit of the concessionary period described at subsection (2) does not apply to a premium which:

(i) is an additional premium;

(ii) is regarded as received by the insurer on or after 1 April 1997; and

is in respect of a risk which was not covered by the contract before 1 April 1997.

6. Subsection (4) provides that subsections (1), (2) and (3) above are construed in accordance with the anti avoidance provisions in clause 29.

7. Most insurers use the special accounting scheme to account for Insurance Premium Tax. Under Section 68 of the Finance Act 1994 they are allowed to treat the date they enter as the premium due date into their accounts (the "premium written date") as the date on which they actually receive the premium.

8. This Clause provides that, for those insurers, if the premium written date falls before 1 August 1997 and the premium relates to a contract made before 1 April 1997 that premium may be taxed at 2.5 per cent. This allows for the fact that much insurance is sold through intermediaries and there may therefore be some delay before an insurer can enter these premiums in his records. Such premiums are likely to have been set before the rate change as inclusive of only a 2.5 per cent rate of tax

9. The concessionary period works as follows. An insurer writes a premium on 1 July 1997, which relates to an annual contract which was renewed on the due date of 31 March 1997. That premium is liable to tax at 2.5 per cent.

10. Adjustment, or additional, premiums are written by an insurer when the original risk to which a contract relates is changed in some way so that an additional premium becomes due (to cover any extra risk). This clause allows certain additional premiums the benefit of the concessionary period.

11. To prevent the concessionary period being used to avoid Insurance Premium Tax this clause excludes from the concessionary period those additional premiums relating to a new risk which is added to a contract made before the date of the rate change.

12. For example, a contract of insurance made before 1 April 1997 covers a building. In May 1997 the owner of the building purchases a second building and, to avoid Insurance Premium Tax at the new rate, he arranges for it to be covered under the original contract, and to pay an additional premium during the concessionary period.

13. The additional premium, which relates to a new, post 1 April 1997 risk, is liable to Insurance Premium Tax at 4 per cent.

CLAUSE 25 : INSURANCE PREMIUM TAX : TAXABLE INTERMEDIARIES AND THEIR FEES

INTRODUCTION

1. This clause introduces a new section 52A to the Finance Act 1994, which makes anti avoidance provisions to ensure that premiums subject to the higher rate of insurance premium tax are not split into taxable and non taxable elements to reduce the tax liability.

2.. It provides that in certain circumstances fees charged by specified intermediaries, who will be known as taxable intermediaries, will be treated as premiums received under contracts liable to Insurance Premium Tax at 17.5 per cent. The intermediary charging the fee will be required to register for Insurance Premium Tax and to account for the tax to Customs and Excise.

3. The clause is required to counter tax avoidance.

DETAILS OF THE CLAUSE

4. Subsection (1) provides that this clause will apply where a fee is charged by an intermediary and the following five criteria are met:

(a) that fee is charged at or about the time when a higher rate contract is effected;

(b) the fee is charged in connection with a higher rate contract;

(d) the fee is charged to the insured; and

(e) the intermediary charging the fee is a taxable intermediary.

5. Subsection (2) provides that where this clause applies a payment to a taxable intermediary in respect of a fee shall be treated as if it were a premium received under a taxable insurance contract by an insurer. The premium will be treated as received when the payment is made and will be subject to Insurance Premium Tax at the higher rate.

6. Subsection (3) provides that tax charged by virtue of subsection (2) above will be accounted for by the intermediary as if he were the insurer.

7. Subsection (4) provides that for the purposes of this clause a contract of insurance is treated as a higher rate contract if it is a taxable insurance contract and if all or any part of the premium is liable to tax at the higher rate.

8. Subsection (5) defines the term "taxable intermediary" as a person who charges a fee in the circumstances described in subsection (1) and who falls within the description at subsection (6).

9. Subsection (6) defines a person as falling within this subsection if he is a supplier of goods or services as defined in subsection (7), is connected to such a supplier or pays a fee or commission to such a supplier or a person connected to such a supplier.

10. Subsection (7) provides that a person is a supplier of goods or services falling within this subsection if he supplies cars or motor cycles within the meaning of paragraph 2 of Schedule 4 (Insurance Premium Tax; premiums liable to tax at the higher rate); relevant goods within the meaning of paragraph 3 of Schedule 4 or if he is a tour operator or travel agent.

11 Subsection (8) defines the term "connected person" by reference to the definition in s.839 of the Taxes Act 1988.

12 Subsection (9) defines the terms "insurance related service"; "tour operator" and "travel agent".

13. Sub-Clause (2) provides that the provisions in this clause have effect in relation to payments in respect of fees charged on or after the day on which Royal Assent is given to the Finance Bill 1997.

BACKGROUND

14. Insurance Premium Tax is accounted for on all amounts due to the insurer under the contract of insurance, including commission. Without the provisions in this clause an insurer or an intermediary could arrange affairs so that tax at the higher rate was due only on the net premium. Rather than being paid by commission derived from the taxable premium the intermediary would charge a fee under a contract

separate to the contract of insurance, on which no Insurance Premium Tax (or Value Added Tax) was due. This loophole would allow the

continuation of current arrangements under which suppliers of taxable goods and services, acting as insurance intermediaries, take a high margin on the VAT exempt insurance they sell with their taxable goods or services and a low margin on those goods or services.

15. This is essentially a deterrent measure. The charging of such fees is currently not usual practice and few, if any, intermediaries are expected to have to register for IPT purposes.

CLAUSE 26: INSURANCE PREMIUM TAX : REGISTRATION OF TAXABLE INTERMEDIARIES

INTRODUCTION

1. This clause introduces a new section 53AA to the Finance Act 1994. It deals with the registration of taxable intermediaries so that they account to the Commissioners of Customs and Excise for the insurance premium tax on fees which they charge.

DETAILS OF THE CLAUSE

2. Subsection (1) provides that a person who is a taxable intermediary and who is not registered for IPT is liable to be registered for IPT.

3. Subsection (2) provides that the register of taxable intermediaries may contain such information as the Commissioners of Customs and Excise think is required for the purposes of the care and management of the tax.

4. Subsection (3) provides that a person intending to act as a taxable intermediary and charge taxable intermediaries' fees and who is not already charging such fees in the course of another business shall notify the Commissioners of their intention.

5. Subsection (4) provides that a person who ceases to act as a taxable intermediary and charge taxable intermediaries' fees in the course of all his businesses shall so notify the Commissioners.

6. Subsection (5) provides that where a person who is liable to be registered by virtue of Subsection (1) above, the Commissioners will register him from the time when he begins to charge taxable intermediaries' fees whether or not he has made a notification to the Commissioners under subsection (3) above.

7. Subsection (6) provides for the Commissioners to cancel a registration upon satisfactory notification under subsection (4).

8. Subsection (7) provides that where the Commissioners are satisfied that a person has ceased to charge taxable intermediary's fees in the course of any business of his, but that person has not made the notification required by subsection (4) they may cancel that person's registration.

9. Subsection (8) provides that for the purposes of this clause the Commissioners may make regulations setting out certain procedural aspects of registration and notification.

10. Subsection (9) defines "taxable intermediary's fees" for the purposes of this Part.

BACKGROUND

11. This clause is a necessary extension of the anti avoidance measure provided for in clause 25. If intermediaries are required to charge IPT, there must be some mechanism by which they bring it to account (to ask the insurer to account for this IPT by way of the insurer's registration for IPT would not be viable, since this would require the insurer to account for tax on a contract to which he is not party).

12. This is essentially a deterrent measure. The charging of such fees is currently not usual practice and few, if any, intermediaries are expected to have to register for IPT purposes.

CLAUSE 27: INSURANCE PREMIUM TAX : TAXABLE INTERMEDIARIES: SUPPLEMENTARY PROVISIONS

INTRODUCTION

1. This clause makes various amendments to the Finance Act 1994 to ensure that most of the key rights and obligations of registered insurers apply to registered taxable intermediaries.

DETAILS OF THE CLAUSE

3. Subsection (1) provides that the Finance Act 1994 be amended according to the following provisions.

4. Subsection (2) provides for an amendment to allow regulations to be made which require a taxable intermediary to notify the Commissioners of particulars which appear to the Commissioners to be necessary for the purpose of keeping the register of taxable intermediaries up to date.

5. Subsection (3) provides that regulations may be made in relation to claims by taxable intermediaries for IPT credit.

6. Subsection (4) provides that taxable intermediaries with no business establishment or other fixed establishment in the United Kingdom must appoint a tax representative.

7. Subsection (5) defines the rights and duties of persons appointed as a tax representatives of a taxable intermediary.

8. Subsection (6) inserts a new category into the list, found at section 59 of the Finance Act 1994, of those of the Commissioners' decisions which persons affected by those decisions might ask to be reviewed.

9. Subsection (7) provides that for the purposes of this clause the Commissioners may make regulations relating to the business of a

taxable intermediary when that business is carried on by a partnership or other unincorporated body.

10. Subsection (8) provides that where a taxable intermediary is part of a group registration any business carried on by a taxable intermediary as a group member is to be treated as carried on by the representative member and that, where the representative member is not a taxable intermediary, the representative member shall be taken to be a taxable intermediary in relation to any taxable intermediary's fees earned by a member of the group.

11. Subsection (9) amends section 73 of the Finance Act 1994 (interpretation) to include a definition of "taxable intermediary" and "taxable intermediary's fees" for the purposes of this Clause.

12. Subsection (10) provides that references in certain parts of the Finance Act 1994 to a registrable person include a reference to a taxable intermediary and provides that regulations may be made setting out certain procedural aspects relating to registration, accounting for the tax, record keeping, and penalties.

13. Subsection (11) provides for penalties for persons who fail to notify the Commissioners of their intention to charge taxable intermediary's fees.

BACKGROUND

14. Although the registration of taxable intermediaries is primarily a deterrent to tax avoidance, the measures contained in this clause are necessary to ensure that all of the existing administrative machinery can also be applied to taxable intermediaries.

CLAUSE 28 : INSURANCE PREMIUM TAX : AMOUNTS CHARGED BY OTHER INTERMEDIARIES

INTRODUCTION

1. This clause amends section 72 of the Finance Act 1994 which defines the term premium.

2. It describes the amount which is to be treated as premium due under the contract of insurance. It also clarifies the treatment of a fee charged by an intermediary in connection with a higher rate contract which, although deemed to be a premium by virtue of Clause 25 does not form part of the premium on which the insurer has to account for Insurance Premium Tax.

DETAILS OF THE CLAUSE

3. Subsection (1) provides that any amount charged to a person in connection with a taxable insurance contract is to be treated as part of the premium due to the insurer unless:

(a) the premium is liable to IPT at the higher rate; or

(b) the amount charged to the person is charged under a contract which is not the contract of insurance and is identified in writing to the insured as an amount which is not charged under the contract of insurance.

4. Subsection (2) provides that the provisions in subsection (1) have effect in relation to payments received in relation to amounts charged on or after 1 April 1997.

BACKGROUND

5. IPT is due on the gross premium charged under the contract of insurance, including any "commission" or "mark up" retained or added by an intermediary. This clause reinforces the existing position by requiring that, in order for an amount charged in connection with a standard rate contract to be treated as outside the scope of Insurance Premium Tax, the insured be notified in writing of the existence of a

separate fee contract and the amount of that fee. This requirement is consistent with the insurance industry's Code of Practice.

6. Fees charged in relation to a contract of insurance which is liable to IPT at the higher rate are treated differently since if an attempt is made to reduce the amount of IPT due on a premium by claiming that an amount paid by the insured is paid under a separate contract this fee will in itself be liable to IPT at 17.5 per cent, provided certain criteria are met.

CLAUSE 29: INSURANCE PREMIUM TAX : PREVENTION OF AVOIDANCE

INTRODUCTION

1. This clause inserts new sections 67A, 67B and 67C into the Finance Act 1994 which are intended to counter avoidance of insurance premium tax by forestalling.

2. Where an attempt at forestalling has been made, new section 67A deems the related premium to have been received or written on the date of the rate change. New section 67B removes the benefits of the concessionary period (introduced by clause 24) from premiums where an attempt to forestall has been made.

3. New section 67C provides for certain exceptions in situations where a contract is caught by the anti-forestalling provisions provided for in sections 67A and 67B. This section is needed to ensure that an entire premium is not caught by the anti-forestalling provisions where, in fact, only a part of that premium should be so caught.

DETAILS OF THE CLAUSE

4. Subsection (1) inserts new sections 67A, 67B, and 67 C.

5. 67A(1) provides that this clause applies when an increase in the rate of Insurance Premium Tax is announced.

6. 67A(2) provides that where an attempt is made to avoid Insurance Premium Tax by prepayment for a contract beginning after the date of the change in rate, the related premium is treated as if it were received on the date of the rate change.

7. 67A(3) provides that subsection (4) below applies where an insurance contract commencing before the date of the proposed change in rate is extended to cover an artificially extended period of time.

8. 67A(4) provides that where the situation in subsection (3) applies any part of the premium relating to the extended contract which is attributable to cover for any period of time after the first anniversary of the date of the rate change is to be treated as if it had been received on the date of the rate change.

9. 67A(5) provides that where, by virtue of the above subsections, a premium is treated as received on the date of the rate change this will have effect notwithstanding the provisions of the special accounting scheme, which allow insurers to treat a premium as received on the date as at which they enter it into their records.

10. 67A(6) provides that any attribution of those parts of a premium which are affected by the anti-forestalling provisions will be done on a just and reasonable basis.

11. 67A(7) defines "increase" and "Minister of the Crown" for the purposes of sections 67A and 67B.

12. 67B(1) provides that new section 67B applies where an announcement of a proposed rate change is made, and the concessionary period (provided for in clause 24) for insurers meeting the conditions in subsection (2) is announced.

13. 67B(2) describes the conditions which must be satisfied in order for the concessionary period to apply to a premium. These are:

(a) the premium must relate to a contract made before the date of the rate change;

(b) the premium is treated as received by the insurer before the end of the concessionary period.

14. 67B(3) provides that where an attempt is made to avoid Insurance Premium Tax by writing a premium during the concessionary period in relation to a contract made before the date of the rate change, which covers risks which begin after that date, the contract is to be treated as made on the date of the change.

15. 67B(4) provides that subsection (5) will apply where an attempt is made to avoid Insurance Premium Tax by writing a premium during the concessionary period which relates to cover for a risk which commences before the date of the change and extends beyond the first anniversary of the change.

16. 67B(5) provides that where the circumstances in subsection (4) above apply the tax rate applicable to the premium attributable to the period of cover falling on or after the first anniversary of the date of the change will be determined as if the related contract was made on the date of the rate change.

17. 67B(6) provides that any attribution made under this clause should be made on a just and reasonable basis.

18. 67B(7) defines "the date of the change" and "Minister of the Crown" for the purposes of section 67A and 67B.

19. 67C(1) provides that the provisions in sections 67A and B concerning early payment of premiums to avoid Insurance Premium Tax do not apply if a premium relates to a class of risk where it is normal practice for the premium to be received before the date when cover begins.

20. 67C(2) provides that the provisions in sections 67A and B concerning the artificial extension of cover to avoid Insurance Premium Tax do not apply if a premium relates to a class of risk where it is normal practice for cover to be provided for a period exceeding twelve months.

21. 67C(3) provides for:

(a) 67A(2), (3) and (4) and 67B(3), (4) and (5) to apply separately to each risk insured under a contract of insurance which provides cover for more than one risk;

(b) 67A(2)(3) and (4) and 67B(3),(4) and (5) to apply to an insurance contract covering more than one risk as though the amount of the premium attributable to each risk were a separate premium for a contract covering only that risk;

(c) the provisions mentioned in (a) and (b) above to apply separately to each given risk and the separate premium relating to it; and

(d) any further attribution required by 67A(3) and (4) or 67B(4) and (5) to be made; and

(e) for subsections 67C(1) and 67C(2) above to be applied to each risk and the separate premium relating to it.

22. 67C(4) provides that any attribution made under this section is done on a just and reasonable basis.

23. Sub-clause 2 provides that in the application of new section 67:

(a) the announcement of a proposed increase described in 67A(1) and 67B(1) shall be taken to have been made on 26 November 1996;

(b) the date of the rate change is 1 April 1997; and

27. Sub-clause 3 provides that an amendment made by 67A(1) has effect on and after 26 November 1996.

BACKGROUND

28. Forestalling involves payment before the implementation of a rate change (for a contract commencing after that date) or buying up an extended period of insurance cover under a contract commencing before a rate rise. Where an attempt is made to avoid Insurance Premium Tax in such ways, the premium is treated, under new section 67A, as received or written on the date of the rate change, and it thus becomes liable to Insurance Premium Tax at the new rate.

29. Subsections (3) and (5) of section 67B effectively remove the concessionary period from insurance premiums where an attempt to forestall has been made. These provisions move the start date of the related insurance contract so that, for the purposes of this clause, the contract is deemed to start on the date of the rate change. The related premium will therefore fail one of the conditions which must be met in order for the concessionary period to apply.

30. For example, an insurer using the special accounting scheme writes a premium on 1 February 1997 relating to a contract which started on 1 March and which covers risks beginning on 1 April. The premium is caught by the anti-forestalling provision designed to counter forestalling by pre-payment (section 67A(2)) and is deemed to have been written on 1 April 1997. However, the insurer maintains that as the contract was made before the date of the rate rise, he can claim the benefit of the concessionary period. The benefits of the concessionary period are therefore removed by virtue of deeming the contract start date to be 1 April.

31. Section 67C refines the anti-forestalling provisions so that separate risks under one insurance contract can be considered separately. For example, a premium relating to a contract of insurance is received on 31 March 1997 (i.e. before the date of the proposed rate change). The contract covers two risks, insurance cover for one commences on 31 March, and for the other on 1 May. The anti-forestalling provisions relating to pre-payment will apply only to that proportion of the total premium which relates to the risk for which cover commences on 1 May.