Finance Bill

Debate between Kirsty Blackman and Richard Burgon

Monday 27th June 2016 Commons Chamber

[Kirsty Blackman]

I appreciate the chance to deal with insurance premium tax. Reducing tax was raised by the SNP at some length last year, when the Government increased it by about 3.5%, from 6% to 9.5%. We were a bit concerned that this amounted to an incredible hike with very little warning, possibly setting a precedent.

I want to make it clear that we are not against spending additional money on flood defences. Given the climate change issues that we face and the devastating impact of floods on communities, we think that is a good idea and we completely understand why the UK Government are choosing to spend money on it. My issue is that raising insurance premium tax might be the wrong way of doing so—I do not want people to be discouraged from taking out insurance. The Minister said that the clause might mean only a minor change in people’s bills, but I am concerned less about the 0.5% increase than about the precedent that has been set by what is happening this year and what happened last year. My main fear is that the UK Government will decide on a further increase.

This morning the Chancellor said that the UK economy was affected by the fact that the markets were currently volatile, and that that volatility would continue. In such circumstances, we do not want people to worry about their future finances, and not to take out insurance because the economy is uncertain and they do not know how the financial situation will develop. It is necessary to have home insurance, just as it is necessary to have motor insurance, but premiums have increased significantly, mostly because of problems caused by climate change. Although the average increase will be £1, people who have been hit by flooding are having to pay massive premiums, and the 0.5% increase is likely to have a disproportionate impact on them.

We do not intend to press the clause to a vote, because we do not want Members to have to stay here longer than they have to, but I appreciate the opportunity to speak about it. Let me end by emphasising that our concern relates to the longer term. Although 0.5% is a fairly minor hike, if the amount continues to rise year on year there will be an additional problem for household budgets, and a negative impact every year.

[Richard Burgon (Leeds East) (Lab)]

I am pleased to be able to add my contribution to those already made by Members on both sides of the Committee.

As my hon. Friend the shadow Financial Secretary has said, the Bill is rooted in unfairness, and we fear that this tax change may engender further unfairness if it is passed on to customers. Clause 129 increases the standard rate of insurance premium tax from 9.5% to 10%, initially from this October, and all premiums, including those in the special accounting scheme, will be subject to it from February 2017. The Chancellor also announced in the Budget that the funds generated by the increase would be allocated to increased spending on flood defences. What concerns us is how this will affect the insurance market, how it will affect the millions of customers who need access to insurance, and how effectively it will deliver the flood defences that we so desperately need.

This is the third increase in insurance premium tax under the current Chancellor, following increases in 2011 and in last year’s Finance Bill. The first increase was from 5% to 6%, a comparative leap of 20%. Last year’s increase was from 6% to 9.5%, and there was then a 58% leap. This year’s 0.5% increase to 10% is therefore comparatively smaller. Some insurance companies have welcomed the fact that it was not larger, but it follows hot on the heels of the previous change. The frequency of increases is picking up, and that frequency is causing concern.

In March, Ben Flockton of PricewaterhouseCoopers said that of

“concern to many insurers is the prospect of gradual but frequent rate rises.”

David Jordorson, of the Association of British Insurers, said recently that the association had urged

“HM Treasury and HMRC to revisit the arrangements for how rises are implemented”

in order to

“put members on a clearer footing when future rises come”.

Perhaps the Minister will put us straight on whether the Government expect to hold the current rate where it is after the Finance Bill, for the next five years or for just one year—or will we see a further change in the autumn statement? I am sure that the industry, consumer groups and policyholders will be hanging on to our words in this debate.

The latest increase brings the standard rate of the tax up to a total of 10%, which is a doubling—a 100% increase —since 2011. Cumulatively, these three rate rises being passed on to customers would have a real impact on disposable incomes and on policy uptake. We understand that this change will have an impact on 26 million drivers and 20 million households. It will also hit 3 million pet policies and 3 million private medical policies. Our concern is that the industry will pass on this cost to its customers. Moneysavingexpert.com put it bluntly when it said:

“Millions of households and motorists will pay more...a further rise in the cost of pet, car, mobile, contents, buildings and private medical insurance”.

James Dalton, director of general insurance policy at the Association of British Insurers, said:

“Another increase in Insurance Premium Tax would be a raid on the responsible that laser-targets those who do the right thing. It will hit those on low incomes and increase the risk that some people reduce their cover or stop insuring altogether.”

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants said that

“the rise will affect anyone who has home or car insurance wherever they live.”

More recently, in the last few weeks, the AA has published its latest British insurance premium index, covering the first few months of 2016. It found that the average quoted “shop-around” premium—that is, the average of the five cheapest quotes for each customer in a variety of scenarios—had jumped by 5.4% to £114.52 a year at the end of March 2016. So the emerging evidence is of an increase in cost of insurance to the customer.

I will come to the issue of flood defences later, but the Chancellor stated in his Budget speech that this measure was also intended to help to fund the cost of flood defences. I want to raise the issue of flood insurance, including that provided through the Flood Re scheme, which is already increasing costs for customers. Of course we on these Benches support the introduction of Flood Re, but insurers are having to pay a total of £180 million to Flood Re, and that is being passed on. In a survey by the Financial Times, seven out of the 10 largest home insurers said they would pass all or some of the levy directly to customers. I understand that 350,000 properties are currently expected to benefit. We believe it is vital that those in flood-prone areas can access the insurance they need, particularly as the instances of flooding as a result of climate change appear to be on the increase.

What will be the impact of the insurance premium tax and the Flood Re levy being passed on to customers? Our concern is the effect on take-up for those on the margins—that is, those hit by other attacks on income in this Finance Bill, in the Chancellor's Budget and, who knows, in his emergency Budget yet to come, as well as those hit by successive cuts to pay, pensions and protection of welfare payments over the past six years. The Government’s policy paper relating to the change in the Bill states:

“The measure is expected to have a small impact on individuals and households purchasing insurance which is not exempt from IPT, if insurers choose to pass on the IPT rate rise to customers”.

I would like to take this opportunity to ask the Minister what the term “small impact” means. Which individuals and households will be impacted upon? What discussions did the Treasury hold on the likelihood of the increase being passed on to customers, both with insurance providers and with consumer groups?

The Government’s policy paper also says that no equalities impacts have been identified. The Association of British Insurers has highlighted the fact that many families face insurance bills around £100 higher as a result of last year’s increase. We are concerned that this is a tax burden that will ultimately be paid by ordinary people taking the responsible approach and insuring their homes and motor vehicles. What will it mean for those on lower incomes? Will younger or older drivers be disproportionately adversely affected? How will the change’s impact be monitored? Our worry is about the impact of rising costs, contributing to our overall concern about the Finance Bill as a whole. That is why, when the last change to insurance premium tax was discussed in the previous Finance Bill just a few months ago, my hon. Friend the Member for Worsley and Eccles South (Barbara Keeley) tabled an amendment.