Insurance premium tax

What it means

Insurance premium tax is a separate levy on non-life premiums. The insurer is the taxpayer, but the client bears it economically because it is priced into the policy.

It does not apply to life insurance or compulsory motor cover, which carry their own levy. On property, own-damage and liability policies it is part of the price.

Insurance is exempt from VAT, and insurance premium tax partly takes the place VAT would otherwise fill. The base is the premium received, not the sum insured, so the same cover with a higher excess means a lower premium and less tax built into what the client pays.

How it works in practice

It appears separately on the premium notice. For a company it is not recoverable like VAT: the whole premium including the tax is a cost of the period the cover relates to.

Where a policy is paid a year ahead the full amount does not go straight to expenses but is spread through accruals across the months of cover.

With a car on leasing, own-damage cover is often part of the instalment or recharged by the leasing company. The tax is then buried in the total, so when reviewing the contract we separate premium from instalment and services, putting each part in the right account and period.

What to watch out for

On insurance taken out abroad the duty to declare the tax can pass to the Slovak policyholder. Companies discover this in an audit, when a foreign policy turns up in the books with no filing behind it.

Because the tax is shown separately on the notice, an inexperienced bookkeeper sometimes enters it in the VAT return as a deduction. An audit reverses it and the company pays the VAT back with interest and a penalty, although the policy itself was paid properly.