Your Money: Clarke's new tax that might do consumers a favour Clarke puts the squeeze on warranties and travel cover
Sunday 01 December 1996
The measure was tagged onto the back of an increase in insurance premium tax (IPT) from 2.5 per cent to 4 per cent, which itself is expected to feed through into higher premiums from April, particularly for car drivers.
Claiming it as an attack on tax-avoidance by retailers, the Chancellor announced that policies sold with holiday packages, household appliances and used cars (mechanical breakdown insurance) would be taxed more heavily from April, at a rate of 17.5 per cent, equivalent to VAT.
All too often these policies are poor value and can be bought cheaper elsewhere but are hard-sold or a requirement of a deal and can be used as a way of disguising the true price of holidays particularly.
Electrical warranties are pushed by shops and can be linked to particular discounts, and many people might well get a better deal buying one of the specialist policies sold separately by financial firms such as Norwich Union and the TSB. The Consumers' Association says many shop warranties are poor value and the Office of Fair Trading has already criticised shops for failing to give customers adequate information about what they are buying.
In announcing the levy the Chancellor said that some retailers were artificially inflating the price of their warranties as a way of avoiding value-added tax. Should they pass on the new levy in even higher prices this should help highlight that consumers might well be better off shopping around for cover.
Alternatively, the loss of the tax avoidance advantage may push retailers into charging prices that more fairly reflect the cost of the warranty, or even into no longer selling warranties. The downside, however, could be that reduced profits from warranties would mean higher prices of appliances generally.
By contrast, getting a particular holiday discount or deal from a travel agent or tour operator is all-too often dependent on taking out an insurance policy from the same company. The Office of Fair Trading says this conditional selling can lead to consumers being sold unsuitable or expensive insurance. The Monopolies and Mergers Commission is considering banning the practice. As with warranties the 17.5 per cent levy could help highlight the value of shopping around, even if this means losing a holiday discount or otherwise being penalised. Jonathan Biles, the chief executive of WorldCover Direct, a specialist travel insurer, said: "This makes the case for a specialist policy more compelling." Or it could also add to the pressure for more transparent pricing, with the same downside that the prices of the holiday part of the package might rise.
Elsewhere, insurers are insistent that they intend to pass on the increase in the basic rate of insurance premium tax. With premiums already rising on motor policies after a period of fierce price competition, car insurers in particular say they cannot afford to absorb the extra cost. But the tax also affects house, private medical insurance and travel insurance sold direct.
Behind the income tax cut headlines Kenneth Clarke made little progress towards the Conservatives' stated goal of getting rid of capital gains tax and inheritance tax. From next financial year the first pounds 6,500 of profits made from the sale of shares and other assets like second properties will be tax-free, up from pounds 6,300 for this year. But the increase simply reflects the traditional uprating in line with inflation. Inheritance tax is levied on estates left by the dead and on gifts made within seven years of death. The Chancellor increased to pounds 215,000 the amount of estates (which include houses) which is tax-free. This pounds 15,000 increase, which is three times inflation, should keep the number of taxpaying estates to 14,000 in the next year, according to Inland Revenue. But it also means that people should not ignore the range of wheezes available, while still alive, to reduce their potential bill.
One final change for the cash-strapped - people who rent out rooms in their own home will from April be able to receive pounds 4,250 rent a year tax- free, compared with pounds 3,250 this year.
The Budget in brief
q Basic rate of income tax down to 23 per cent.
q Personal allowances up, more of income to be taxed at 20 per cent. Forty per cent tax to kick in at higher level.
q Tax-free capital gains allowance up to pounds 6,500.
q Tax-free inheritance tax allowance up to pounds 215,000.
q Insurance premium tax up to 4 per cent; up to 17.5 per cent on policies sold with other goods.
q Tax-free rent from letting out rooms up to pounds 4,250.
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