IPT part 2 - insurance intermediaries: who’s on the hook for IPT when errors arise?

In our previous article, we discussed how an IPT cost arises for insurance intermediaries and why it is worth considering ways to reduce this.

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Justine McInnes
Published: 29 May 2024 Updated: 29 May 2024
Business tax Tax

In this article we look at what can go wrong for insurance intermediaries and how insurance intermediaries can protect themselves.

The bordereau

The starting point in any discussion on errors is the bordereau; taking B Ltd from our previous article, B Ltd reports the policies which it has arranged for I Ltd, the insurer, on a monthly bordereau – which in B Ltd’s case is an Excel spreadsheet.

If there are any errors on the bordereau, whether these result from IPT calculation errors or data entries, I Ltd as taxpayer will be liable. However, under the terms of the broker agreement it is very likely that B Ltd will be liable in contract law to reimburse I Ltd, subject to any arguments around causation, liability exclusion clauses etc.

In our previous article, we also talked about how B Ltd had managed to reduce its IPT cost to £840k from £1.2m by using ‘unbundling’. But what happens if a decimal point has been misplaced on B Ltd’s bordereau and B Ltd therefore reports IPT of £84k instead of £840k to I Ltd?

If I Ltd checks the bordereau and the error is picked up, the bordereau can be amended so that the correct amount will be accounted for on the IPT return.

The difficulty in our experience is that in busy tax departments, bordereau are rarely checked. I Ltd is no exception to this and therefore accounts for £84k IPT instead of £840k to HMRC. A year later HMRC raises an assessment for the amount which I Ltd, as the taxpayer has underpaid, £756k plus a 30% penalty of roughly £226k plus statutory interest of roughly £17k.

Under the terms of the broker agreement, B Ltd has agreed to accept full liability for errors such as these and therefore not only has to reimburse I Ltd for the underpaid £756k but also the penalties and interest of almost £250k.

The agreement between the intermediary and the insurer

Is it fair that B Ltd has to suffer the financial consequences? This is a matter of commercial agreement between the parties. Our experience is that even where it isn’t intended, the terms of the broker agreements with intermediaries tend to be standard templates which aren’t updated regularly. Issues which we’ve seen arise as a result of this include the intermediary ‘oversharing’ the risk by being financially liable for things which aren’t necessarily its fault, the agreement not adequately covering what should happen if HMRC disagrees with the IPT treatment which has been applied and so on.

How can intermediaries protect themselves?

Probably the easiest way to address this is to think about some fundamental IPT accounting questions, for example:

  • How is the bordereau generated? What is the nature of bordereau reviews? Are bordereau reviews subject to checks against internal records such as journals and ledgers?
  • Who is responsible for determining the IPT liability of different products? Who reviews these decisions?
  • How are mid-term adjustments dealt with – including any administration or cancellation fees?
  • Aside from IPT accounting questions, do the terms of the agreement between the intermediary and the insurer reflect the commercial agreement and is the intermediary taking on more responsibility for errors than they realise or than they should?

The takeaway

If the answer to any of these questions reveals gaps in the IPT accounting process or issues with the agreement between the intermediary and the insurer, we can assist with ensuring that the process is more robust and that you are adequately protected. Please do get in touch with your usual contact or Justine McInnes.

Coming up

In our next article we will be looking at common types of IPT errors and how they can be avoided or identified.

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Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2024/25.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.