MANAGING TAX RISKS : VAT on insurance services

        Last week we discussed in detail the classes of insurance as per the Insurance Act, 2009. These include long term insurance business, general insurance, health insurance and self-insurance.

Today’s article looks at the time of supply of insurance services for VAT purposes.

Time of supply of insurance services

The purpose of the time of supply rules is to establish the date when a supply of goods or services is regarded as being made for VAT purposes. The time of supply therefore establishes the date that the supplier is required to declare the VAT charged on any supply made, and the date that the recipient may be permitted to deduct input tax on goods or services acquired. The output tax and input tax is declared and deducted by the vendor on a monthly return at the end of the applicable tax period covering the time of supply.The general rule for time of supply is provided for under section 15 of the VAT Act that provides that the value added tax imposed on a taxable supply shall become payable at the earlier of:

• the time when the invoice for the supply is issued by the supplier;

• the time when the consideration

for the supply is received, in whole or in part; or

• the time of supply.

With regards to the time of supply, the act definesitto mean:

• in relation to a supply of goods, the time at which the goods are delivered or made available;

• in relation to a supply of services the time at which the services are rendered, provided, or performed;

• in relation to a supply of immovable property, the earlier time at which the propertyis created, transferred, assigned, granted, or otherwise supplied to the customer; or delivered or made available.

Time of supply for insurance business

For purposes of insurance business the time of supply is the earlier of when the invoice is issued; receipt of premium or when the insurance services are rendered or performed. Thus when the following activities are performed the time of supply condition is met and thus VAT is applicable:

• Receipt of money by the broker

• Transfer of premium to the lead insurer

• Transfer of money to other insurers

• Reinsurance with other insurers

• Receipt of reinsurance commission

• Payment of cash compensation

• Replacement of an insured asset

• Payment of agency fee

• Payment for other services or goods and so on.

Further, it is important to note that an insurance policy document does not create an obligation for the insurer to supply any service, or for the insured to make payment in respect of any supply.Any renewal notice does as well not create any obligation and issuance of such renewal notices may not be taken to be time of supply.

Mr Makundi is a partner with Auditax International