Martin Bennison from Ultimate Finance explains why a small increase in insurance premium tax could have serious consequences for construction.
Martin Bennison
On 1 June the rate of insurance premium tax (IPT) rises by 2% to 12% on nearly all transactions. We’ve known for a while that this rise was on the way – it was announced by Philip Hammond in his Autumn Statement last year and will bring an estimated £650m extra into the Treasury’s coffers in the first year alone.
However, it may be that the Treasury is alone in welcoming the rise, the third in as many years. The change has received a very poor reception wherever you look: the Association of British Insurers said the rise is “a hammer blow for the hard pressed” and representatives from all the major insurance sectors, both private and commercial, have decried what they see as a “stealth” rise.
As ever, it’s the small firms, the SMEs that are the lifeblood of the UK economy, that are hit hardest by tax rises such as this. James Dalton, director of general insurance policy at the Association of British Insurers, is right when he says that the IPT rise “could cost jobs, drive up prices” and that companies “may decide to reduce their insurance cover” because of the rise.
In the construction industry, any reduction in insurance cover has very serious implications. We all know that the risks involved in building projects of any scale and, thanks to effective regulation, there’s few reputable firms that would risk breaking the law. But some do and this number may increase when insurance gets more expensive.
"In the construction industry, any reduction in insurance cover has very serious implications. Thanks to effective regulation, there’s few reputable firms that would risk breaking the law. But some do and this number may increase when insurance gets more expensive."
What happens when there’s a site accident? Who foots the bill when a claim needs to be made? Who covers the legal costs when a company is taken to court? Insufficient insurance is not only illegal, it’s dangerous.
The average SME in construction is also under constant threat from disreputable firms, who work cash in hand and therefore don’t pay IPT at all. This is an age-old battle but when margins are tighter than ever an SME operating legally, with all necessary insurance in place, is going to have to pass on the rising costs to their customers, making them even less competitive.
This is a dangerous situation, a double-whammy of damage to the industry in which illegal firms get even more work while honest SMEs are driven out of business, shedding jobs and damaging both local and national economies.
Some might say that this is scaremongering but there’s evidence to take this prediction very seriously. A recent survey by the British Insurance Brokers’ Association (BIBA) reported 90% of brokers fear that a further rise in IPT will prompt clients to reduce their insurance protection or buy no cover at all.
These may be worrying times but if construction companies are feeling the squeeze, there are things that can be done to alleviate at least some of the financial pressures caused by increasing costs. Managing cash flow is one of their biggest headaches faced by SMEs and the construction industry has a number of unique factors that mean payments can get held up.
There are products that can help with this, ranging from simple invoice finance through to specialist construction finance, designed to unlock the capital a company has in its existing projects.
At a time of political change, it’s hard to make predictions but there are very few taxes that are ever reduced once they’ve risen. The best we can hope for is that after three successive years of increase, the new government puts a freeze on IPT, allowing SMEs in the construction sector to adjust to their new costs. After all, an inadequately insured construction industry is bad news for everyone.
Martin Bennison is MD construction finance at Ultimate Finance
