MANAGING TAX RISKS : VAT on insurance services

Last week we looked at taxable insurance services and VAT on modes of acquiring an insurance policy. We noted that the general VAT principle is that what is not an exempt supply automatically becomes a taxable supply.

For the purposes of supply of insurance services, all insurances services except life insurance, health insurance, insurance premiums for air craft and insurance for workers compensation are taxable insurance services.

We also looked at the various modes of acquiring an insurance policy including direct insurance and the use of agents and brokers.

It was pointed out that an insurance policy concluded by an insurance agent acting on behalf of the insurer is as good as an insurance policy concluded with the insurer.

Likewise an insurance brokerage deal concluded with the agent of a broker is as good as an insurance brokerage deal concluded with the broker.

Today’s article explores further the implication of the agent and principle relationship in the context of vatable transactions in the insurance business.

Use of agents and brokers

The VAT Act defines an agent as a person who acts on behalf of another person in business.

The consequences provided under section 88 of the VAT Act underpins the documents requirements in respect of the supply which is:

a) made by an agent or to an agent on behalf of the principal; and

b) made to agent on behalf of the principal.

Where a taxable supply is made by an agent or to an agent on behalf of the principal and both the agent and the principal are registered persons; any documentation required to be issued by the principal, including tax documentation, may be issued by the agent or to an agent in the name, address, TIN and VRN of the principal.

Likewise where a taxable supply is made to an agent acting on behalf of a principal and both the agent and the principal are registered, any documentation required to be issued to the principal, including a tax invoice generated by electronic fiscal device or adjustment note, may be issued to the agent and shall be in the name, address, TIN and VRN of the principal.

The agent is therefore obliged to issue or receive all documents the principal would have otherwise been obliged to issue or entitled to receive but the documents shall be in the name, address, TIN and VRN of the principal. This exactly compares with the practical insurance dealings whereby an insurer provides relevant documents to his agents.

Implications

In the insurance business, agents are often involved in the conclusion of the transaction and the maintenance of the policy.

These agents play an important role in the insurance industry.

The VAT consequences of persons who act as agents is that these agents are liable to register and account for VAT in respect of the receipt of premiums, commissions, fees and other types of income received if they meet the VAT registration threshold.