I beg to move amendment 1, page 59, line 19, at end add—
“(6) The Chancellor of the Exchequer shall, within three months of the passing of this Act, undertake, and lay before both Houses of Parliament, a review of the impact of any further rise in the standard rate of insurance premium tax with particular attention to the impact on—
(a) the price charged for insurance policies; and
(b) the take-up of insurance policies”.
With this it will be convenient to take clause 43 stand part.
The change in the level of insurance premium tax from 6% to 9.5% will have an impact on insurance premiums, and it will mean increased costs for families. Treasury figures show that the increase will have one of the biggest impacts on Government finances of any policy revealed in the summer Budget. By 2021 Ministers will have brought in an extra £8 billion from the measure, a cost that is likely to be passed on by insurance companies to consumers, so as we debate clause 43 and Labour’s amendment I want to ask the Minister to explain the reasons behind the level of this tax rise and to ask whether Ministers have fully considered where the impact of this rise will be felt and which groups will be most affected.
In 2010 the coalition Government announced a similar but much smaller rise in insurance premium tax from 5% to 6%, but this most recent change increases the tax by 58%. I want to ask the Minister for the reasoning behind that scale of change.
A colleague of the Minister in the Lords, Lord Northbrook, has described the insurance premium tax increase as an easy target. Taxes should not be increased just because they are easy targets. Indeed, any decision to increase Government revenue should be undertaken after a robust analysis of the impact the changes will have on individuals and businesses. There are still many questions to be answered about the impacts of this measure on family finances and on the take-up of insurance. So in addition to other questions later, I want to start by asking why the Government have chosen to make such a marked increase in insurance premium tax from 6% to 9.5%, an increase of 58%.
Does the hon. Lady agree that the proposed new level of tax will still be substantially lower than the 19% rate levied in Germany, and that the proposals strike the right balance between raising revenue and making sure premiums are competitive?
I do not think making such comparisons is particularly valuable and I will come on to the reasons why.
The insurance industry has raised concerns about the impact of this increase. Huw Evans, director general of the Association of British Insurers, responded to the proposed increase in insurance premium tax by warning that consumers would be worse off. He said:
“Insurance Premium Tax is a tax on people and businesses at the point at which they buy a general insurance product. So it’s very disappointing to see a more than 50% tax increase being imposed on consumers, especially when the insurance industry and Government has worked so hard in recent years to bring down the cost of essential insurance.”
The ABI calculates that the new rate of insurance premium tax will add almost £10 to the average annual household insurance policy for buildings and contents combined, and over £12 to the average annual comprehensive motor policy. However, the increase will be much higher for some groups, and I want to come on to talk about them.
Does my hon. Friend share my concern about householders in areas prone to flooding who might already have to pay high premiums and for whom this is an additional amount they will have to find on top? That is certainly the case for a number of properties bought under the Help to Buy scheme set up by the Treasury, as those properties built after 2009 are not eligible for the Flood Re insurance scheme the Government have brought in.
Indeed, and I will come on to that, because the cumulative impact of this and other changes in the Budget on specific groups is of great concern. My hon. Friend is right that there could be a real issue in parts of the country prone to flooding. We do not want to see families in the properties my hon. Friend talks about that are outside the Flood Re scheme go without insurance.
If the hon. Lady wants to forgo this substantial increase in revenue, what would she replace it with, given that her income tax proposals would also cut the revenue because the higher rate would collect less?
It is not for me to make those suggestions; it is the Government’s Budget, not mine.
“The sting is in the tail. The Insurance Premium Tax increase on the average car insurance policy is still equivalent to a fuel duty increase of almost 2p per litre. Either way drivers are being hit in their pockets. This is an outrageous hike which could well backfire by leading to an increase in uninsured drivers.”
Will the hon. Lady join me in welcoming the fact that the freeze on the motor fuel duty escalator over the past three or four years has saved motorists far more than the 2p a litre to which she has just referred? It is saving the average motorist about £10 every time they fill up, which is far more than the 2p that she mentions. Will she join me in welcoming that measure?
No I will not. As I have just stated, the president of the AA, Edmund King, has said of the Budget:
“The sting is in the tail.”
It is fine to make improvements that help the motorist, but the sting is in the tail and he has made the point that this is an outrageous hike. I ask the hon. Gentleman to reflect on the impact on young motorists and the possible increase in the number of uninsured drivers. If that were the result of this hike, it would be a very dangerous development.
The chief executive officer of the British Insurance Brokers Association, Steve White, has also raised concerns about the impact of the tax on insurance policies and on the industry. He makes this important point:
“Those hit by this stealth tax will include the 20.1 million households with contents insurance, 19.6 million with motor insurance and 17 million with buildings insurance. The Government has been working with the industry to reduce the cost of insurance for consumers…It therefore seems counterintuitive to be taking measures which will add to the cost—effectively taxing protection.”
Let us be clear about what is going on. This is a tax on the protection that families need.
The Financial Secretary to the Treasury, who is now in his place, has made clear in the past his views on the impact of increases to this tax. In 2010, he said of the smaller rise that was introduced at the time:
“I am not denying that we expect the increase to be passed on predominantly to consumers; we expect that the bulk of it will be.”—[Hansard, 15 July 2010; Vol. 513, c. 1130.]
We need to be clearer about which groups will be affected by this increase and what impact it will have. Car insurance and home contents insurance policies will clearly be affected. Of course we welcome the assurances that the Government have given about preventing a rise in VAT, income tax and national insurance, but families in the UK will still be hit by these changes to the insurance premium tax. This tax increase on families comes in addition to other Budget measures that will hit families, such as cuts to tax credits. We must always keep in mind the cumulative impact on families of all the Government’s policies.
Hon. Members have asked what else we would do. The tax rise is also contrary to what the Chancellor promised before the election. He said that
“tax increases are not required to achieve”— further consolidation, and that this
“can be achieved with spending reductions”.
So the Chancellor did not foresee these measures. Despite his claim, however, he has chosen to deliver a Budget that increases taxes as well as placing a significant squeeze on public finances and services. The average household is likely to be affected by these changes in multiple ways. Many families purchase more than one type of insurance, which means that they will have to pay this tax increase more than once.
We must also consider the effect of the policy on different groups. People’s insurance needs differ depending on their age and income and on whether they own their home. Those who have high premiums are more likely to be adversely affected by this increase to the taxation rate. The groups that I single out are young motorists, homeowners and some businesses. For example, insurers have estimated that the average cost of a year’s cover for drivers under 25 will jump by around £50. The British Insurance Brokers Association has stated that
“a young driver or an experienced driver in an inner city area would see the amount of tax on an annual car insurance premium of £1,500 increase from £90 to £142.50”.
Young motorists already pay the highest premiums, with the average policy for someone who is under 25 already costing more than £1,200 a year. For a young apprentice, jobseeker or student, the increase could make the difference between being able to afford insurance so that they can travel to work for their first job and not being able to do so. Young people are already having their eligibility removed for housing benefit, jobseeker’s allowance and the new minimum wage, and this is just another financial burden that the Government are placing on them.
Another group facing higher insurance premiums are people who have become unemployed. A BBC report in 2012 showed that those without a job are generally asked to pay more for motor insurance cover than those in full-time employment. BBC research with three different brokers found that car insurance premiums averaged almost a third more—30%—for those out of work, but that the cost could be as much as 63% higher. People who are out of work already face many challenges: looking for a job; finding the money to pay their rent or mortgage; and finding the money to feed their families and run their homes. Insurance premiums are higher than regular premiums, so this increase is just another blow to people who are struggling to find work.
We must also consider the impact this policy will have on businesses, as corporate insurance premiums will also be affected by this increase. Although large companies might be able to absorb it, concerns remain about how small and medium-sized businesses will be affected by the extra cost. Will the Minister therefore tell me what assessment has been made of the impact of the tax rise on the take-up of insurance by business?
The insurance industry is also under a significant amount of pressure to implement the changes needed for this tax increase, which will apply from
“Firms had no advance warning of the increase in Insurance Premium Tax announced in the Budget, meaning preparations for the implementation date of
The Government’s failure to foresee this difficulty suggests the need for a more thorough assessment of similar tax increases in future and a consideration of whether industries can implement changes in such a short period of time.
The rise in insurance premium tax may also put extra pressure on insurance companies, given their other obligations. We have already touched on the Flood Re scheme, which was introduced in 2011 as a mechanism to protect households at risk of flooding from high insurance premiums. In 2013, as part of the Flood Re scheme, the ABI and the Government agreed to a cap on flooding insurance premiums in order to ensure that affordable home insurance was made available to those most likely to need it in the event of a flood. The Flood Re pool has two sources of income: the flood element of the policies passed into it; and an additional levy on the industry. Although the amount of money the levy needs to raise each year is fixed, if insurance companies start to see a significant decrease in profits because of the rise in insurance premium tax, they may consider passing on more of the cost of this levy to policyholders, again meaning a steeper increase in their premiums. My hon. Friend Diana Johnson has already raised the issue of households outside the Flood Re scheme suffering higher premiums. Once again, those with the highest premiums could suffer the most, particularly if those with lower risks decide to forgo insurance altogether.
“information collected from tax returns and receipts”.
We believe there is a need for more in-depth analysis and understanding of exactly who will be affected by the increase and the impact this will have on the take-up of insurance. Concerns have been raised that the increase in the insurance premium tax rate could create perverse incentives and market distortions, meaning that fewer people take up the correct level of insurance to cover them against certain risks and liabilities. Clearly, insurance is a vital tool that helps people plan for risks in their lives. We should be encouraging people to take out policies that suit their needs and encouraging the insurance industry to offer competitive and affordable policies—it seems the Government were concerned about that but their concern has now ended.
We believe that vehicle insurance is of the greatest importance, because drivers are legally required to insure their vehicles if they want to drive in the UK. The legal minimum of third-party insurance covers drivers if they have an accident causing damage or injury to any other person, vehicle, animal or property. It is right that the UK law encourages drivers to take that responsibility. When fines for driving uninsured are becoming a fraction of the costs of insurance, higher premiums could lead to more uninsured drivers, and there is a real fear about that in the industry. Young drivers already face premiums of more than £1,200, and that will increase with this tax increase, so a fixed penalty which can be only £300 and six penalty points could be seen increasingly as a risk that people are—wrongly—prepared to take.
There seems to be the assumption that the entire increase will be passed on—perhaps in part it will—but I visited one of the country’s largest insurers in my constituency and it did not seem to have cause to pass on the increase. Perhaps the hon. Lady should reflect on that and see that passing on such costs may not be automatic. It may be that a reduction in corporation tax means that the costs can be absorbed.
I think that I have already covered that. In a debate in 2010 it was accepted that these costs are almost always passed on. Almost every commentator has said that the costs will be passed on. Aviva and RSA have already announced that they will pass them on, so all the signs are that they will be passed on. Clearly, it would be good if any part of the insurance industry decided not to pass on the costs, but what we are seeing is an increase in premiums across the piece.
This tax increase on a merit good like insurance could undermine the message that individuals and society benefit if the correct level of insurance is taken out. An increase in the insurance premium tax of 58% punishes families and individuals for acting responsibly. When there have been previous increases in the tax, they have been something in the order of around 1%. There is a major concern that this steeper increase could be large enough to alter the coverage chosen by customers, which means that they would become underinsured. It may be that Conservative Members do not face problems of underinsurance in their constituencies. I must say that I have seen a lot of it in my constituency. People really suffer when they are underinsured. If levels of crime are high and there are other issues affecting them on the roads, underinsurance is a real issue.
The Government need to ensure that tax policies do not lead to a situation in which families struggling on low incomes decide to forgo insurance or let their previous policies lapse because prices have risen and they decide that they can no longer afford insurance. That could leave many families at risk of great loss in the event of burglary, or if they have a road accident.
Underinsurance could be a consequence of this rate rise. People could also opt for cheaper policies, which means that they do not get the right coverage, or they opt for higher excesses, which effectively means that their coverage is less. Buying insurance can be a complicated business and a good price may often take precedence over having the right level of coverage.
The HMRC policy paper for this rate rise estimated that there would be
“a small reduction in the demand for standard-rated insurance.”
Any fall in demand for insurance that leaves families open to greater risks should be avoided. Where does the Minister believe this “small reduction” is likely to occur and what is she doing to prevent reductions in the demand for insurance?
Finally, HMRC suggests that there could be changes in the behaviour of insurance companies. It states that there is likely to be
“a small increase in tax planning activity by insurance companies.”
What are the Government doing to minimise this further potential unwanted consequence?
Clause 43 is a typical measure from a Conservative Government who promise one thing and then deliver the opposite. In this case, the Chancellor promised before the election that he had no need to raise taxes, but then he raised this tax, which will have an impact on households throughout the UK and on their usage of insurance. The increase could have a number of negative consequences. Higher insurance premiums may lead to fewer families and individuals purchasing much-needed insurance to protect themselves against everyday problems, which happen much more often in some parts of the country than in others. I am talking about burglary and damage to property and possessions.
The Government must provide more information and analysis of the wider impacts of this tax increase, as well as strategies to prevent the negative consequences that are likely to result from this policy. Labour’s amendment to Clause 43 asks the Government to consider the impact of any future increase of the tax.
The Institute for Fiscal Studies has called for a road map to indicate a long-term strategy for our tax system. The CBI has outlined its concerns about the UK tax system in a letter to the Financial Secretary, stressing the need for Ministers to recognise that
“changes to the tax system that appear innocuous can have wide-ranging effects.”
The CBI also stated that there was a need for “renewed discipline” in tax policy making and that the lack of consultation and notice period for tax changes can cause great uncertainty for businesses. None the less, the Government continue to increase and lower taxes for short-term policy goals. Labour believes that we need to consider how to reform our tax system so that people and businesses are taxed efficiently and fairly.
As I have outlined, there are particular concerns about this and any future potential rise in insurance premium tax because of the impact it might have on the price of insurance policies and the take-up of insurance by families and individuals. With that in mind, will the Minister comment on the potential for any further increases in the insurance premium tax during this Parliament, given the comment of her colleague in the Lords that the tax is an easy target?
Labour’s amendment will ensure that the impact of any future increase is properly considered by the Government. It will ensure that there are careful deliberations—much more careful than we have seen on this occasion—on the short and long-term consequences of any further increase in the insurance premium tax and its effect on families and business. I ask Members on both sides of the House to support our amendment tonight.
I remind the House that I advise an industrial and an investment company and the details are set out in the register.
I found it interesting to listen to Barbara Keeleyspeak from the Opposition Front Bench on this important matter. As someone who thinks that taxes are best kept low and that we need to do all we can to maximise the spending power of those we represent, I had a lot of sympathy with much of what she was saying. Of course, there will be people who do not want to pay an increased insurance tax—who does? In particular, some people will find it difficult because it is quite a high tax. I would have found the hon. Lady more convincing had she been able to answer the question in my intervention: if not this, what?
We have just had a passionate debate in this House in which the Opposition, understandably, wanted us to do more for Syrian refugees. That takes money. We are already being very generous with our overseas aid budget, and although we understand their motivation they are not proposing lots of reductions in spending.
Perhaps the right hon. Gentleman has forgotten that in July we voted against the cut in inheritance tax in the Budget, which would bring in another £1 billion in the final year.
That is interesting, because one of the difficulties with capital taxes is that they are sensitive to the rate and details of the scheme. The first rule of any tax must be that if it is raised, more revenue must be got from it. One thing that is certainly true of this insurance tax is that although we would rather it was at a lower rate, it is still at a low enough rate that if we raised it we would collect more revenue. I am not sure that that is true of the inheritance tax system, and the hon. Lady must understand that quite a lot of her constituents are not very happy about the current regime and are looking for changes.
The hon. Lady might well find that some of her constituents have aspirations and could be successful; I am surprised that she is so negative about them. Many people in all parts of the country welcome the idea. In 10 or 20 years’ time, if there is a death in the family and assets pass, they would be grateful not to have that limit. It was a good effort and I accept that the hon. Lady came up with the least bad of the Labour attitudes. Everything else that Labour wants to do involves either spending more money or increasing tax rates, which will reduce the revenue.
The right hon. Gentleman should be directing his question to the Chancellor, because, as I said, it was the Chancellor who said that
“tax increases are not required to achieve further consolidation, as
“this can be achieved with spending reductions”
The right hon. Gentleman ought to be asking the Government and his right hon. Friend the Chancellor his question rather than the Opposition, because the promise to the electorate—this is the important thing—was that there would be no tax increases, yet here we are soon after the Budget with a tax increase that will hit many millions of households and bring in £8 billion.
But I support the Government on that. I think that they are right to want to make more progress in bringing down the deficit—I am not sure whether the hon. Lady agrees. I also think that they are absolutely right to honour the very important promise they and I made to our electors not to increase income tax or VAT. Better still, we must honour our pledge to get income tax down, particularly for people on lower incomes, by raising the threshold. I also wish to see reductions in income tax at the 40% level, which affects many of my constituents and those who aspire to better jobs and pay, which we hope our economic recovery will deliver to many more people. We are honouring our pledge not to increase income tax rates, but to make the cuts we specified over the five-year period, and we are honouring our pledge on VAT.
There seems to be a very selective honouring of pledges going on. The pledge not to increase taxes is not being met, because £8 billion is being taken. The other thing that I am very concerned about is the Government’s decision to ditch the pledge to cap social care costs. It is one thing to allow people with properties worth £1 million not to pay inheritance tax, but it is quite another when people up and down the country will be hit by the dropping of the pledge to cap care costs. Perhaps the right hon. Gentleman would like to comment on that, because I am sure that it affects his constituents just as it affects mine.
I think that we are now going rather wide of the amendment and the clause that we are meant to be debating. I wish to see a generous care system that is properly controlled and disciplined. If the hon. Lady has individual cases where people will be adversely affected unreasonably, I am sure that Ministers will be willing to look at them. The last thing I wish to see is unreasonable cuts affecting people who really need the money, but I also wish to see more work done—this is what the Government are doing—to promote the abilities of many people, including those she suggests are disabled, because many people have many abilities. This Government are about encouraging those abilities, helping people to do more for themselves and, where possible, to get into work so that they can lead more rewarding lives, and so that they can receive pay in addition to the benefit assistance for which they currently qualify. There is a complete policy there to promote better lives for everyone in society, and cutting income taxes is an important part of that, and promoting abilities and opportunities is another.
Does the right hon. Gentleman not recognise that there is a moral hazard to a degree in taxing insurance? There is a moral hazard that we recognise through the fact that 80% of activity in the insurance business is not taxed. Therefore, if we are increasing the tax burden on that 20% simply to raise revenue, it might be worth coming back and looking at the consequences.
That is very good advice, and that is exactly what this Committee is trying to do by highlighting the issue in a short but thorough debate.
I will now make some progress on the specific matters relating to insurance tax. It passes my first test, which is that if we have to increase a tax rate we must ensure that we get more revenue from it. It passes that test because the starting rate is sufficiently low, and the forecasts indicate that we will see a substantial increase in revenue as a result of the change.
The second question is what is its distributional effect. The hon. Member for Worsley and Eccles South understandably made much of the cases that are the hardest, but overall I would imagine—the Minister may have some figures—that people who are better off will pay more of this tax than people who are not so well off, because a lot of it is insuring property and asset and businesses, and it will be the people with the most substantial assets and businesses who will pay rather more of that tax. It therefore meets a general test of fairness in the sense that it is progressive.
My one nervousness about that—I look forward to the Minister’s response on this—is over the issue of the young driver, which the hon. Member for Worsley and Eccles South raised. I think that we need to ensure that we have a very supportive package for young people generally, because they are finding it difficult to price themselves into housing, and they do not always get the rates of pay at the beginning of their careers that we would like to see them enjoy. It is very important that we keep cutting the income taxes at the lower end of income, especially for them, because they really need to keep everything they earn if their starting pay is not very good.
The biggest problem for the young driver, particularly the young male driver, is that the starting prices for insurance can be exceptionally high. Indeed, it is sometimes difficult for the very young male driver to get insured at all. We have to ask ourselves why that is. The main reason, of course, is that the young driver is perceived to be a bad risk by the insurance company. There is some evidence that the younger driver may, on average, have a worse record than the older driver, and that is why the premiums can be particularly high on younger people.
Perhaps the Government can help rather more, through and with the industry, to tackle the main problem, which is not the tax on the premium but the initial height of the premium. Some good work has been done in the industry to provide methods of reassurance that the young person will drive well and safely by means of technology in the car that monitors them, at their own request and with their agreement. That may be the price of their getting the lower premium. We need to look at how technology and support for good driving can be reinforced so that a young person is more readily insurable at a realistic price. Of course, if the young person behaved recklessly, that would become obvious and the arrangements would have to be changed, but there are ways in which this can be done.
It is not a question of technology changes. This £50 increase, at least, in the duty paid on the very high premiums that the right hon. Gentleman is talking about will prevent young people—presumably young men, more than young women—from getting to the point where they can start to gain experience. The age at which people will be able to be insured will advance and advance so that they will be unable to get started. That is the issue. It is not a question of technology but of making insurance affordable, and this makes it worse.
I am trying to deal with the underlying reason why it can be very difficult for young men, in particular, to afford insurance. The big problem is not the increment on top of the current insurance tax or the bigger increment resulting from this Bill; it is the starting level of the premium. People are working on ways in which we may be able to address that.
If the young person can accept a system that will reassure the insurer that they are going to drive sedately, prudently and safely, then the reason for charging them more disappears. By accepting the constraints of the technology, they can demonstrate that they are driving safely. That reinforces their cheaper premium and they can start to earn the bonuses that the rest of us enjoy if we have driven safely for a long period and then get discounts on the insurance costs. It is getting started that is so difficult for young males, in particular, when they are all judged by the average standards of high claims that the industry experiences. I hope that the Minister and her colleagues in Departments more directly related to the insurance industry will look at this problem. It is not caused primarily by the tax system but by assessment of risk and perceptions of driving behaviour. It can be very unfair on individuals, and the more that can be done to smooth that out, the better.
I do not like tax rises. Part of the reason I am in Parliament is that I want to be a voice to try to keep taxes down and have a more prosperous society as a result. I cannot say that I welcome this part of the Finance Bill, but as someone who believes that there are important public items that we cannot cut, and faced as we are with Opposition parties that very rarely come forward with any proposals to save public money, we have to raise a reasonable amount of money. We have been borrowing too much, and this is part of a series of measures to try to get our borrowing under some kind of control. With regret, I conclude with the Government that this is one of the least bad options for trying to do that. I hope that they will take on board the need to work away at some solutions to the underlying problem of individual categories such as young drivers who may find this to be another increment on top of a difficult situation.
I want to speak briefly to amendment 1, tabled by my hon. Friend Barbara Keeley. It centres on the need to review within three months the impact of clause 43 on the charges for and take up of insurance policies. As I said in my intervention on my hon. Friend, the proposal relates directly to those properties that are not part of the Flood Re scheme.
I want to address this issue because of its effect on Kingswood in my constituency. Hull was one of the most successful areas in the country for the previous Government’s Help to Buy scheme. I welcome that. Obviously it is important that people are assisted in buying their own homes and properties. The problem, however, is that more than 95% of the city of Hull is below sea level and it has been prone to flooding in the past. In 2007 we had very bad surface water flooding, so insurance companies look at what has happened in Hull and fix their premiums accordingly.
The Flood Re scheme has assisted in the past and we now have the new Flood Re scheme. The problem, however, is that it does not apply to properties built after 2009. Those young people and first-time buyers who have bought properties in Kingswood over the past few years are not able to access the Flood Re scheme, so they have to go to the open market for house insurance. I am concerned that those people, who are trying to do the right thing and buy house insurance, may find themselves being doubly penalised, because not only are they not entitled to the Flood Re protection, but they will have to pay this increase in insurance tax.
Yes. There are many welcome things in the Flood Re scheme, but, if I recall my reading on it correctly, it does not cover small businesses operated by people from home. I do not want to go too far down the road of Flood Re, because clause 43 relates to insurance tax.
I welcome the Labour Front Benchers’ proposal and I hope the Minister will be willing to consider a review. I do not agree with everything John Redwood said. The properties I am talking about are small starter homes. These people do not earn a lot of money. They do not have big properties or an income that would allow them to pay sizeable premiums for a property. They are struggling and are often on the minimum wage. They have bought their properties, but every penny counts and I am worried that they will not be able to afford to pay not only a hike in premiums because they are not in the Flood Re scheme, but an additional increase in tax.
The cost of home contents insurance has fallen across the country by about 8% since last year. Does the hon. Lady agree that, as a result, clause 43 will have a limited effect on those sorts of costs and that it strikes a fair balance between raising revenue and maintaining a competitive insurance market?
Unfortunately that is not the experience of many of my constituents in Hull. Every year lots of people contact me when their premiums are up for renewal, because they have such difficulty in getting affordable insurance. I stress that that is particularly the case for those who are not in the Flood Re scheme, which offers some protection at premium levels. I am concerned about those who are not part of the scheme and are in small properties and do not earn very much—as I have said, every penny counts. There should be a review so that those people, who generally will do the right thing and pay for insurance, do not find themselves unable to afford to do the right thing in the future. I hope the Minister will take on board what my hon. Friend the Member for Worsley and Eccles South has said.
I thank Barbara Keeley for raising the significant issue of fuel duty, which affects all our constituents. It is, however, important to recall the context in which that taxation arises, which is the need to close what is still a very large deficit. Where opportunities exist to adjust taxation sensibly, it is prudent to do so.
My hon. Friend Mr Mak mentioned the context a few moments ago. Home insurance premiums have reduced by 8% year on year during the past year, and car insurance premiums have reduced by about 10% during the past three years. Those reductions more than offset this relatively modest tax increase. I share the distaste of my right hon. Friend John Redwood for tax increases, but I understand how, in these times of financial difficulty and given the need for deficit reduction, difficult choices have to be made, and I fear that this is one of those difficult choices.
I want to expand on my intervention about the effect of the fuel duty escalator. One of the most significant areas of insurance premium taxation is that of motor vehicles. The suspension of the fuel duty escalator has had a really quite impressive effect on the cost of motoring. The hon. Member for Worsley and Eccles South mentioned an estimate that the insurance premium tax increase would add about 2p to a litre of fuel. I have done some rough calculations on my iPhone during the debate, and I estimate that the saving delivered by the freeze in the fuel duty escalator in 2011 has saved approximately 12p per litre. Taken together, the effect of this Government’s policies on the cost of motoring is a net saving of 10p per litre, which I very strongly welcome.
I want to say more about an opportunity to do more to combat the cost of insurance premiums. I have personal experience of the very widespread practice of making fraudulent claims, particularly for personal injury. I will mention some statistics in a moment, but I will first talk about my personal experience.
A year or two ago, my wife and I were involved in a very minor traffic collision: the car got a bit of a bump and the bumper had to be replaced, but it was nothing more serious than that. A claims management company based in the north of England somehow got hold of my mobile phone number. I have no idea how it did so—from the breakdown recovery company, the insurance company or the police—but weekly for at least a year after the accident, I was called by an extremely pushy and aggressive salesperson. Essentially, they incited me to commit fraud. No matter how often I explained that I, my wife and my young twins had suffered no injury, they insisted that I must have suffered an injury such as a bad back or an aching neck and that I had a claim that could be settled at the insurance company’s expense. They repeatedly and persistently incited me to commit fraud.
The figures show that that is not an isolated example. Aviva is currently investigating 5,500 claims of personal injury fraud. Such fraud has increased 20% year on year. Personal injury claims have increased by 50% since 2007, despite the fact that the number of road traffic collisions has fallen during that period. In this country, personal injury claims make up 35% of insurance pay-outs; in Germany, it is only 4%. Aviva estimates that those claims add £50 to each and every insurance premium paid in this country, which is significantly more than the tax increase we are debating. It is estimated that one in nine personal injury claims is fraudulent.
We have an opportunity to do more to stamp out such fraud and to reduce the cost of insurance premiums, as hon. Members on both sides of the House have mentioned. I believe that there is a case for simply banning outright outbound phone calls by ambulance-chasing law firms. We should just make it illegal for them to call people to incite fraudulent claims. I would certainly be very happy to vote for legislation to outlaw such a practice. If anyone has a genuine claim, they can find a law firm’s number in the “Yellow Pages” or on Google; people do not need to be phoned in this way. I urge both Government and Opposition Front Benchers to take my proposal very seriously.
I will do something that feels slightly unusual and address my brief remarks to clause 43.
We know that there is a planned increase from 6% to 9.5%—an increase of 58%—but let us not forget that that also applies to administration costs. Throughout the debate, the figures have been evaluated and we have realised that the increase to house contents cover will affect about 20 million people. The people who are likely to move more frequently are those who are not owner-occupiers. Of course, that plugs into the argument, which has already been proven, that lower income groups pay more. The so-called poverty premium, which was explained by Donald Hirsch and backed up by the Joseph Rowntree Foundation, is therefore valid in this instance.
The Government state that the tax applies to only one fifth of all premiums, but that is the wrong measure. We should be concerned about the distribution of those premiums. Young drivers aged 21 to 29 make up 14% of the driving population, but 34% of uninsured drivers. Perhaps Adrian Smith of KPMG called it correctly when he noted wryly:
“All I can guess is that there were so many taxes David Cameron ruled out increasing that there weren’t so many left”.
If the driver for this proposal is an increase in tax-take, it should be noted that the rise in January 2011 actually saw a fall in tax receipts of 1.3% between 2011 and 2015. Despite that, the Government suggest that receipts are expected to grow by 1.9% year on year between 2015-16 and 2020-21. I wish I shared their confidence. It may be that higher income groups will drop their health insurance, which is included in their P11D liability. That would, of course, put more pressure on the NHS.
Although the tax is levied on companies, I believe that it will inevitably be passed to consumers. It seems somewhat anti-business that the insurance industry, having done the right thing in making determined attempts to reduce fraud and passing the savings on to consumers, is rewarded with such a significant tax rise over such a short timescale. Let us not forget that businesses will also be affected by the application of the increase to corporate premiums. My worry is that that will disproportionately affect small businesses, which continue to struggle with a range of factors in the current operating environment.
Ultimately, if insurance is about protection and the negation of risk, why should it be more expensive for those who have the most to lose—in other words, the lower income groups?
In responding to the debate, I hope to touch on many of the questions that have been raised by hon. Members.
Clause 43 increases the standard rate of insurance premium tax to 9.5%. The policy will increase the revenue raised from the tax and help to close the deficit.
Before I turn to the amendment, I will cover some of the points that have been mentioned. I confirm that the insurance charge includes the gross premium that the insurer chargers, including the broker commission and any other directly related costs. It is a charge on the insurer rather than on the individual. It is due on general insurance, which accounts for approximately one fifth of insurance premiums. As we have heard, it includes motor insurance, home insurance, employers liability insurance and medical insurance.
Some 80% of the insurance market is exempt, including reinsurance, long-term insurance such as life insurance and permanent health insurance, and the permanent health insurance that is used to pay for critical illness insurance.
Travel insurance and insurance that people purchase on warranties with, for example, white goods, is already charged at the considerably higher rate of 20% to prevent VAT avoidance. That, too, is unaffected by the change. It is important to remember that there is no VAT overall on insurance.
The new rate for the taxable insurance premiums will begin to apply with effect from
We do not anticipate that the tax increase will reduce the number of people taking out general insurance. Even if insurers choose to pass on the increase, any increased costs will be a very small proportion of the overall cost of insurance. As the insurance market is competitive, customers affected by the change can shop around to find a policy that best fits their needs.
I hope the Minister will address the point I made about the impact of insurance costs on unemployed people. I quoted BBC research, but work done for MoneySavingExpert.com found that there is an enormous differential when people lose their jobs. In one case, insurance for an office manager to insure her vehicle went from £359 a year to £1,034. It is all right to talk about averages of £10 here or £12 there, or even £50 for young people, but insurance premiums can be disproportionately increased by unemployment. That point was made in the social media debate on the Budget, and that is one reason why I have taken it seriously. The increase is unfair, because it hits people straight away when they become unemployed. We must start to reflect on that.
I will come to the distributional points raised by questions from hon. Members but, with the greatest respect, the situation the hon. Lady describes would be unaffected by the changes the Government propose this afternoon.
We heard from my hon. Friend Chris Philp that the increase must be seen in the context of significant Government action to reduce costs for the insurance industry and for motorists. We are taking a lot of action to reduce insurance fraud. According to the Association of British Insurers, insurance fraud alone adds an average of £50 a year to average household insurance costs. Our previous action to reduce the cost of fraudulent claims includes a ban on referral fees in personal injury cases and reform of the regulation of whiplash claims. Those actions have been welcomed by both industry and consumer groups. The insurance fraud taskforce is due to report at the end of the year with suggestions on how further to reduce the cost of insurance fraud.
In the summer Budget 2015, my right hon. Friend the Chancellor announced a further consultation to establish how to introduce a cap on fees charged by claims management companies, and a fundamental review of the regulation of claims management companies, which is due to report in 2016. I note with interest the point my hon. Friend the Member for Croydon South made about banning outbound calls. More generally, the Financial Conduct Authority is working on how to encourage people to shop around for insurance, which will ensure that people find the best deal for their circumstances and that the market remains competitive.
The Government have been working hard with the insurance industry to develop the Flood Re scheme, which will continue to allow insurers to offer affordable home insurance. Diana Johnson and I both have constituencies where there are a lot of flood-prone properties—I pay close interest to the topic. Of course, properties built after 2009 will be exempt from the scheme because we do not want to incentivise builders to build in flood-prone areas.
I fully accept that; in fact, I think it is absolutely right. The problem for me and my constituents is that 90% of the city of Hull is below sea level. Anything that is built will, by definition, be on a flood plain. A bit more thought has to be given for areas of the country. It is not just Hull; other low-lying areas will find themselves in this difficulty.
The hon. Lady makes a very good point. She and I come across the same sorts of issues in our casework, and a lot of London is built on a flood plain. In some cases, I have had to work with specialist insurance broking to find a broker service. The British Insurance Brokers’ Association is very useful in that regard. I am sure she and I will continue to pay close heed to how the Flood Re scheme is delivering for our constituents.
A number of hon. Members raised the issue of motor insurance, particularly for young people. My right hon. Friend John Redwood asked whether technology could help young people with the costs of their insurance. Young people can currently take the opportunity to install a telematic device. Many insurers will reduce the cost of motor insurance in those situations.
I am able to reassure hon. Members on the impact on young drivers’ insurance premiums. Young drivers pay a much higher premium at the moment, but the overall cost impact of this change for young drivers in their 20s is estimated to be 25 pence a week and the overall impact for a driver aged 17 or 18 about £1 a week. Obviously, all tax increases are unwelcome, but this needs to be set against the fact that drivers are currently saving about £9 every time they fill up their vehicles.
The figures I was given from the industry were that the increase in duty alone on the average premium paid by a young driver would be from £90 to £142.50. That is not 50p or 25p a week; that is £1 a week. Various points have been made about fuel duty, but this is a tax that has to be paid. This is a very serious increase for young people who are being hit in the other ways that I outlined.
The hon. Lady and I can duel with statistics all afternoon, but I wanted to point out that it was the 17 and 18-year-olds who pay a substantial amount more than those in their 20s. I think she is probably quoting statistics relating to 17 to 25-year-olds. Nevertheless, the changes need to be seen in the context of the amount that young drivers are saving and the opportunities they may have from using a telematic device to measure their driving performance.
Finally, I want to say a word about implementation. We recognise that the insurance industry needs notice to effect the changes. We have tried to ensure a smooth implementation of the new rate by following the approach agreed by industry representatives and HMRC back in 1995. That sets out transitional arrangements required by the insurance industry to account for the tax at the new rate. The rate, as we said, comes into effect on
That leads me to the Opposition’s amendment, which proposes that a report be produced on the impact of the change in the standard rate of insurance premium tax as soon as three months from the enactment of the Finance Bill. It calls for the report to be undertaken very soon at a time when the impact of the rate will have hardly begun. That is why we will not agree to the amendment this afternoon and encourage the hon. Lady to withdraw it.
The impact of any increase in the rate of insurance premium tax will depend on whether insurers change their prices to pass on the increase. As I have said, it is a tax on insurers, not customers, and we are aware of at least one insurer—we heard earlier of another example—that has pledged to absorb the cost of the increase for at least one year. We think this is partly because insurers have benefited, and will continue to benefit, from the reductions in corporation tax announced in the Budget. Any such benefit might encourage more of them not to pass on this additional cost.
We have investigated what the overall distributional impact would be if all insurers passed on the entire rate rise. If the entire rate rise of 3.5 percentage points were passed on, households in the top income decile would pay just over £1 a week more for their insurance, while the additional costs for those in the bottom income decile would be less than 40p a week. We calculate that almost two thirds of the overall distributional impact will fall in the top half of the income distribution.
Does my hon. Friend agree that this slim and modest tax rise should be viewed in the context of the falling cost of home insurance and comprehensive car insurance and our commitment not to increase VAT, national insurance or income tax? Overall, will not these policies benefit householders and families?
My hon. Friend is right to point out the overall context; this measure should not be seen in isolation. The cost to businesses was mentioned earlier. I am sure that Members will welcome the fact that, according to the British Insurance Brokers’ Association, the overall cost of insuring a commercial vehicle has fallen by more than 13% in the past 12 months alone.
I hope that I have answered hon. Members’ questions, particularly those about young drivers and household flood insurance. In particular, I want to support the points my hon. Friend the Member for Croydon South made about personal injury claims management.
In drawing my remarks to a close, I must stress that most households will see very little impact from the increase in the standard rate of insurance premium tax. It will remain at a low rate compared with many other countries and will certainly not make the UK a less attractive place to do business. I therefore ask that clause 43 stand part of the Bill and request that amendment 1, tabled by Opposition Members, be withdrawn.
I do not propose to withdraw the amendment. The reason for it is the lack of a full analysis of where the impact of the increase will be felt and the groups that will be most affected. I have been quite disturbed by the complacent attitude of some Government Members, including the Minister. I have quoted many senior industry figures on the impact on their business and industry and the strength of their feelings about this tax, which they have called a stealth tax. I will quote some additional comments. Janet Connor, managing director of AA Insurance, said:
“That premiums have been falling seems to be the Chancellor’s justification for the tax increase but he is wrong. His timing couldn’t have been worse; not only are premiums starting to rise but the tax can only lead to even greater premium increases than could otherwise be expected over coming months.”
“There is no justification for this underhand and unfair tax increase.”
I have quoted various insurance organisations, but the ABI said:
“UK drivers benefit from one of the most competitive motor insurance markets in the world. But with pressure on claims costs”, which some Government Members have recognised,
“and an increase in insurance premium tax adding an additional £12.80 to the cost of the average policy…other factors are starting to put up costs.”
The key thing is that a range of factors are in play, despite our having had a successful couple of years, which has reduced premiums and rates. I hope Ministers will not continue to be complacent about the cost of premiums for young drivers and the danger of under-insurance or no insurance.
Graeme Trudgill, the executive director of the British Insurance Brokers Association, has said:
“Insurance has been seen as a special case in terms of taxation as it is a social good”.
Ministers seem to be ignoring the fact that it is a special case, in that it is a social good. We must take that into account.
No, I will not.
Mr Trudgill went on to say:
“Young drivers are the most over-represented age group for uninsured driving and increasing the cost of their motor insurance further is likely to increase the level of uninsured driving, which we are aware has now started to deteriorate.
The increase completely undermines the constructive work that the industry and government have done in the past few years to tackle fraud—particularly with regard to whiplash claims—which previously saw premiums soar.”
Ministers and Government Members should be clear that what they are doing is hitting the industry at a point when premiums have started to go in the wrong direction and the good work that has been done could be undermined.
I want to leave Government Members with a couple of other points about this amendment. The AA calculates that uninsured drivers cost the insurance industry around £380 million a year and add £33 to cost of every motor insurance policy. Finally, the Motor Insurers Bureau reports that 2.8% of UK motorists—and about 1 million vehicles on the road—are estimated to be driving without insurance. That is the risk that the Minister is taking.