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.
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On the first day in Committee of last year’s Finance Bill, Labour tabled an amendment seeking a review of the impact of the then more significant rise. The review would have happened within three months of the passing of the Act and would have looked into the impact of any further rise in the standard rate of insurance premium tax, with particular attention paid to the impact on the price charged for insurance policies and the take-up of insurance policies. Those concerns still stand.
When the coalition Government first increased IPT in 2011, the Financial Secretary said that
“the increase in insurance premium tax, which is payable by insurers, is likely to be passed on to consumers. We are not denying that; in simple terms, we need the money.”—[Official Report, 15 July 2010; Vol. 513, c. 1131.]
In September last year, the Minister said that
“we expect that any impact on consumers will be modest”
and that
“the average household expenditure on insurance would increase by 70p per week.”—[Official Report, 8 September 2015; Vol. 599, c. 311.]
So here we are again. Can the Minister confirm, to the best of her knowledge, whether this year’s increase will be passed on to consumers? Does she still stick to those figures?
We have already asked that the previous increase be subject to a review and still believe that such a review is important, so that we have the clear evidence before us of the impact on customers. That is our position and that is why we are not supporting clause 129 tonight and recognise the concerns of the SNP. So much of the Bill requires change that we are already obliged to reject it.
Turning to the flood defence spending this tax raise will fund, around 5.4 million properties in England are at risk of flooding from rivers, the sea or surface water. Annual flood damage costs for the whole of the UK are estimated to be in the region of £1.1 billion. There was a significant increase in flood defence spending from 1997 to 2010—an increase of three quarters in real terms. We all remember which party was in government then. Spending on maintaining flood defences fell by 6% a year from 2010-11 to 2014-15, and we all know which Governments were in power then. Given the cuts that have been imposed on flood defences under the current Chancellor, will the £700 million bonus from the insurance premium tax deliver sustainable and equitable funding? The Committee on Climate Change recently concluded that a £500 million gap has emerged between what the coalition spent between 2011 and 2015 and what is required to keep pace with climate change. Friends of the Earth acknowledged that the Chancellor has closed the gap, which is welcome, but he still needs to ensure that future investment keeps pace with rising flood risk.
A £700 million increase on top of the announced £2.3 billion spend is welcomed by the Opposition, but does it deliver what we need and is it sustainable? Will the Minister comment on how the decision was made to “technically hypothecate” the funds raised for flood defences by the measure and what the rationale is? There are few instances of hypothecated taxation in the UK. While the obvious link between the need for flood insurance and the provision of flood defences can be argued, that is not the case so much for those paying other forms of insurance, such as pet insurance. Currently, flood defences are funded through general taxation. Why could the £700 million increase not be found that way? Huw Evans at the Association of British Insurers has argued against the '”technical hypothecation”, writing in his reflection on the Budget that
“it is a slippery slope and we have to continue to argue for all flood defence spending to come from central expenditure”.
Can the Minister say something about the decision to fund flood defence spending through this new tax increase? Was it discussed with flood insurers in advance? How will she monitor it to ensure that it delivers the £700 million stated? As the number of floods increase, will the rate be increased? Fundamentally, just so that this is on the record, can she confirm whether or not hypothecation will take place?
In his Budget speech, the Chancellor highlighted representations from the hon. Members for Calder Valley (Craig Whittaker) and for Morley and Outwood (Andrea Jenkyns) for flood defence funds, saying that this measure would include funding for schemes in Yorkshire and Cumbria. I would highlight recent contributions by my hon. Friends the Members for Leeds West (Rachel Reeves) and for York Central (Rachael Maskell), who have raised on a number of occasions in recent months the issue of the sufficiency—or otherwise—of the Government’s funding plans. The Government have since clarified that the extra funding meant £115 million for Yorkshire, covering Leeds, York and Calder Valley, and £33 million extra in Cumbria. Forgive me for talking about my home city, Mr Chairman, but that translates as £65 million for Leeds, when the Environment Agency in 2011 said the River Aire in Leeds needed a £160 million plan.
As climate change continues, through the inaction of the Government in this area, we are increasingly likely
to need to identify resources to fund flood prevention measures. Once the funds from the increase in insurance premium tax are exhausted, will the Government simply continue to raise it? I would question whether this is enough and whether seeking to provide extra cash through IPT is a stop-gap to patch things up. Patching things up is not enough, given the impact of climate change and the increasing likelihood of further flooding, but patching up is all we get from a Government who are prepared to slash spending on welfare while giving freebies to the wealthiest in capital gains tax. We are therefore going to monitor the impact of the rise in IPT, its effect on the industry and on customers, and its effectiveness in delivering the flood defences we need. We will not vote on the clause stand part, but we will continue to oppose this Finance Bill.