The standard rate of IPT is five per cent, but there is a higher rate of 17.5 per cent for travel insurance and some insurance for vehicles. There is a concession that puts GAP in the five per cent bracket.
This was granted by Customs and Excise after lobbying by trade bodies who were adamant that no value shifting was taking place when GAP insurance was sold with finance agreements. However, the extension of the higher rate of IPT is likely to be restricted to vehicle replacement GAP and could be introduced as early as April 2004.
Vehicle replacement insurance (VRI) covers the value of the vehicle, usually where purchased without finance. In the event of write-off VRI, will pay out the difference between the write off value from the usual car insurer and the cost of the replacement car. The tax was introduced in October 1994 with a single rate of 2.5 per cent. The two-tier rate system was implemented in 1997. Most long-term insurance is exempt from the tax. “We are reviewing our current treatment of GAP and credit protection insurance for higher rate IPT purposes and hope to come to a conclusion shortly with a view to changes taking place next year,” says a Customs spokesman.
Insurance industry experts are predicting an imminent change to IPT. “It is likely the higher rate of IPT will be imposed on GAP insurance,” says Adrian Smith, IPT senior manager at KPMG. “This may lead to changes to the way some dealers sell GAP insurance. There could be a change to the pricing structure – any additional tax cost could be passed on to the customer, taken out of salesman's commissions or be borne by the insurers.”