Insurers exploit pounds 70m tax loophole

Private health firms say exempt policies are backed by DTI

Private medical insurance companies are exploiting a loophole to avoid paying insurance tax worth pounds 70m per year to the exchequer.

Because long-term policies are exempt from the insurance tax, health insurers are encouraging people to sign up for contracts for more than one year.

PPP, the second largest health insurance company, with 2 million policyholders, says that its new policy which avoids the insurance premium tax is its biggest selling product. It has signed up more than 250,000 people in 150 companies to the scheme since it started at the beginning of last year. Bupa has followed up by running a similar scheme. Both are available only to people who receive their private medical insurance from their employers, who consist of 60 per cent of the 6.5 million policyholders.

In last November's budget, the Chancellor increased insurance premium tax from 2.5 per cent to 4 per cent, thus increasing the incentive to try to avoid it. PPP manages to offer its "tax-efficient" policy to companies by signing them up to five-year contracts to insure their employees.

According to PPP, "under the current regime, Long Term Employee Health care does not attract insurance premium tax which is levied on annual private medical insurance policies, or VAT which can be levied on annual private medical insurance policies or VAT which can be levied on administrative services of healthcare trusts".

The opening up of these loopholes is an embarrassment for the Government as it appears to be tacitly encouraging private medical insurance.

PPP says that its scheme is approved by the Department of Trade and Industry as a long-term policy exempt from the tax. A spokesman for the DTI confirmed that this was the case, but said that the decision on tax liability was up to Customs and Excise.

However, at the time of the passage of the Finance Bill introducing the tax in 1994, the then Paymaster General, Sir John Cope, said that such attempts to avoid insurance premium tax would not be successful. In the committee hearing on the Bill, Sir John said in reply to a question about eligibility: "The Honourable Gentleman [Malcolm Chisholm, MP for Edinburgh Leith] asked whether Bupa would be able to get around tax by reclassifying itself as a long-term insurer. Yes, it will be included in the tax and no, it will not be able to get round it."

PPP's view that its policy is tax exempt is also being challenged from within the industry. Julian Stainton, chief executive of Western Provident, said: "These companies are trying to call a swan an ostrich. They cannot get round the tax by setting up so-called long-term schemes because they are a sham."

He pointed out that what was on offer was not really long-term insurance since the cover applied only to employees and those who left were no longer covered. He has taken legal advice from a QC who assures him that the schemes should be taxed and is to ask the Government to ensure that the tax is levied.

Mr Stainton said: "We are bemused. The Government says it wants this tax to be levied, but it seems to be deliberately allowing these loopholes to be created."