Adrian Owens: Abolish the Insurance Premium Tax

Adrian Owens has been a Parliamentary candidate and is on the candidates’ list.  Now a business consultant he also volunteers as a Princes Trust business mentor.  He is a former General Manager of CREATE Liverpool.

> Policy summary

Abolish the 5% insurance premium tax (IPT) charged on household, motor, liability and other general insurances.  The tax discourages a public good and is also regressive.

> Policy explanation

In the November 1993 budget, Kenneth Clarke introduced IPT at 2.5% as part of a massive £5billion tax increase package that included cuts in the married couples allowance and mortgage tax relief.  In 1996 he increased it to 4% and Gordon Brown has subsequently increased the tax to 5%.

When it was first introduced concern about the tax was low.  John Butterfill MP questioned the effect on the insurance industry.  Iain Duncan Smith was the only Conservative MP to express concern in the Finance Bill debate that followed the budget.  It was left to the LibDem treasury spokesman David Rendel to articulate the traditional Conservative position, though of course he did so merely to mock our party as it struggled to control a massive budget deficit. 

Rendel said:

“One would have thought that insurance premiums were close to the heart of the Conservative party. Have not the Tories said that people should stand on their own two feet and look after themselves? Surely one way in which members of the public can look after themselves and make sure that they do not rely on the state to finance them when disaster strikes is through insurance policies, but here are the Government discouraging people from insuring themselves.”

This thinking is at the heart of this proposal.  Tax should not be imposed on people who make the choice to insure against disaster.  Such people will make less call on the state when disaster strikes.

Opposition to IPT has grown over the years.  As early as 1996 Gallup found that 71% of the public thought insurance premium tax was unfair.  By 2002 business was calling loudly for a reduction in IPT led by the Forum of Private Business on behalf of SMEs, as employers’ liability premiums soared.

As with almost all taxes on consumption, IPT is regressive.  The poorest 20% of the population pay a 4 or 5 times greater proportion of their household income on basic home and motor insurance than those at the top of the income scale.

> Political risks and opportunities

The upsides of this measure are numerous.

Symbolism - The tax was imposed, against the grain of Conservative thinking at a time of great financial difficulty.  To propose its reversal would clearly symbolise that the next Conservative Government is determined to regain the mantle of economic competence through reversing tax measures that the last Conservative Government was forced to introduce as a consequence of its previous poor economic decisions.

Effective - Given the highly competitive insurance market, the removal of tax on insurance would likely feed through to the consumer, reducing insurance costs and encouraging people to insure and at the same time reducing the extent of under insurance. 

Conservative - Greater insurance take-up and reduced under insurance will encourage greater self-reliance and confidence among the population.

Positive press - This targeted tax reduction is likely to generate much positive press comment from the mainstream Conservative press.  As the current tax is regressive, any proposal to scrap it also has the potential to reach across the political divide.

The downsides are that arguably there are “sexier” areas for any tax reductions we can offer, and with all proposals for tax reductions - where will the funds come from?

> Questions for ConservativeHome readers

Do you agree (as I do) that the higher rate of IPT – 17.5% - the same rate as VAT - should continue to be charged on travel insurance and extended warranty type insurances for white goods, cars etc?

Are there any other taxes introduced by the last Conservative government which go against the grain of conservatism and should be scrapped?

> Costs

This proposal would cost around £2.15 billion.  I’ll leave aside Laffer curve arguments for the moment and assume that spending would have to be reduced by a corresponding amount.  Where then do we get the £2.15 billion?  My personal favourites would be to scrap the British Council.  This saves £200 million and has the added advantage of making Neil Kinnock unemployed.  Add to that a drastic slimming of the DTI which costs more than £6billion a year and a freeze on central civil service recruitment and we’d have more than enough.  But the choice is yours – just spend 5 minutes on Burning Our Money, the Taxpayers’ Alliance or here at ConservativeHome to identify your preferred waste reduction.

 

Comments

[Wat Tyler]

Adrian is spot on about this- IPT is a classic example of a distortionary tax, and as he argues, makes self-reliance more difficult- especially at lower income levels. Along with his infamous £6bn pa pensions tax grab, IPT epitomises Brown's corrosive disregard for those who strive to provide for their own financial security.

£2.15bn pa is a fair chunk to find, but compared to say the £9bn pa we spend on our hopeless state "skills" industry, or the £2.3bn pa spent on the useless Regional Development Agencies, it's a knock-down bargain.

I support Adrian's proposal.

[Gildas]

Yes, but scrap the whole thing. Travel insurance is a social good too. And extended warranties extend the lifetimes of appliances - countering inflation and (I guess the Cameron fans will like this) reducing the amount of rubbish in the form of old fridges, cookers etc.

[Mark Wadsworth]

YES. It's a nasty little stealth tax, so should be got rid of.

IPT at 17.5% on extended warranties should be retained - this is not a tax in its own right but an anti avoidance provision to stop retailers shifting from white good s liable at 17.5% VAT to insurance taxed at 5%.

The last Tory government's worst tax was obviously Council Tax ... but this raises real money, so a reform thereof is outside thescope of this debate.

[aristeides]

Nope - it is a pretty low consumption tax, certainly compared with VAT (and has the advantage that companies cannot reclaim it as well). Consumption taxes go with the grain of Conservatism: they are voluntary and tax expenditure rather than employment.

It is not particularly regressive because richer people have more expensive cars and houses which attract higher premiums.

By the way, if you buy an extended warranty on white goods, you deserve to to stung again for VAT - everybody knows they are a complete rip-off anyway.

IPT is a fine tax: low, collectable and - pace this debate - uncontroversial.

[Angelo Basu]

The proposal raises the issue about encouraging people to insure for their misfortunes. The poorest in society are also the most under-insured, the most likely to suffer from burglaries and the least likely to be able to "self-insure" themselves to replace stolen items or repair damage to their homes. IPT increasing the cost of insurance is an element of this but the biggest reason why such people have been taken out of the insurance safety net is the high cost of regulatory compliance by insurance providers who traditionally used to service this sector.

In the past, door-to-door insurance sales, paid for in small weekly sums were a commonplace and allowed even those on very constrained budgets to acquire the security of insurance cover. Since the encroachment of stringent regulation of sales of insurance this sector has pretty much completely died out.

One of the savings that could be used to offset the cost of abolishing IPT would be to remove or substantially reduce the regulatory regime in respect of sales of low value insurance policies. This would also have knock on benefits in terms of revitalising a sector of the insurance industry (and increasing the tax take from those businesses) and potentially reducing the price/costs of other services which are provided by those channels (eg Home Collected Credit, Credit Unions).

[Denis Cooper]

It's so uncontroversial that I'd forgotten that it existed, but now I've been reminded I agree it should be abolished. But assuming there isn't enough spare revenue to do that straightaway, how about putting down a marker by starting with motor insurance and recouping the lost revenue by an increase in fuel duty? In line with the sensible principle of taxing car use, rather than car ownership.

[sjm]

Has anyone here read about the massive increase in the number and cost of quangos? I suggest a policy of reducing them, initially by 50%, and the billions of expenditure thus curtailed would enable a significant number of eye-catching tax reductions/eliminations, including the IPT.

I think this process is called 'handbag economics' because anyone can understand it, it's often proposed by women, and it works.

[Patsy Sergeant]

People always make such a tremendous fuss when fuel prices are raised - it is true that we do pay a great deal more than many other countries, BUT if fuel prices were raised as a way of recouping lost revenue, it would at least affect that section of the population that don't believe in insuring their cars, if they even have a licence, because you DO actually need fuel to drive a vehicle. Of course those people could always steal the fuel, as I believe some try to do at the moment!

Yes I think this could be a good idea.

[Londoner]

This would not be a priority for tax cuts for me compared with abolishing Inheritance Tax, abolishing stamp duty on share trading, reducing/abolishing the higher rates of stamp duty on property or the simplying (inevitably at a cost) of CGT and the interrelation between income tax and NI, just to name a few. I agree IPT should be kept at 17.5% when insurance is sold in conjunction with other goods and services for the anti-avoidance reasons given above.

I also suspect in the consumer area that it might reduce downward pressure on rates, at least for renewals, if people were getting a "reduction" anyway on year-on-year premiums through the abolition of the tax, so the main benefit might be to the insurance industry rather than consumers.

Generally on tax, I am not sure that the 100 policies format works very well for voting on this. May I suggest instead that a menu is drawn up of the various taxes that might be cut/abolished, with the simple revenue cost, and that people vote on an order of priority - perhaps for the 10 top tax cuts with ten points for no. 1, nine for no. 2 etc. If then adopted by the party, this would provide a "route map" without committing on timing etc.

[Automated Robot]

This well presented policy deals with the nuts-and-bolts of improving life in this country; not just reacting to public opinion. It may be "unsexy" but it is simple to understand and sends powerful political messages.

Aristeides makes fair comment that a low profile and ease of collection mark this as a poor choice for reform.

However, the whole basis of our tax system needs review: taxes have come a long way from funding the defence of the realm, evolving into crude tools for social engineering (marriage and housing) and behaviour modification (environmental levies). Along the way, politicians have earned the reputation of "taxing what they can get away with".

This reform would make the point we are willing to start the task, and for that reason I support the proposal.

[TaxCutter]

There's no such thing as a nice tax. Despite my dislike of Ken Clarke's stealth tax, I'd keep IPT for the following reasons:

1. Easy to collect and relatively difficult to avoid.
2. I'd rather cut marginal income and corporation tax rates which are more key to growth, investment and rewarding people for their efforts.
3. Why should insurance not have an indirect tax arising upon it, like any other consumer good or service.

[Phil Taylor]

I am sorry but this cannot really be a high priority. The distortion surely is that this piece of spending is not taxed just the same as others?

There are bigger fish to fry such as relieving the poor from taxation and incentivising businesses.

If our PPCs are going to refer to people like Laffer they might at least know what they are talking about. If you abolish something then the tax take goes to zero. Laffer basically says if you tax stuff less, people evade less and are incentivised to be be more productive and your tax take goes up even if the rate of taxation goes down.

[Victor]

Conservatives brought in Insurance Tax, so a better idea might be to get rid of the Conservatives with their huge budget deficits.

[DougR]

Insurance is bad because it encourages fraud and takes guilt away from thieves. I can think of many other taxes which should be cut/abolished first.

[Paul Charlson]

Its difficult to discuss tax cuts in isolation.
For the first time in my life I have begun to resent paying the amount of tax I am doing. The reasons for this are
1. I perceive that the Government has wasted so much of it on poorly conceived schemes.
2. Stealth taxes are frequently unfair
3. I feel I am supporting a raft of people who simply do not want to work
4. The number of people who have come into the country to sponge off our services appears to be increasing.

This may not be hug a hoody but thats how I feel.

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