VAT on insurance services

In our last article we looked at the VAT treatment of claims paid by an insurance company; claims received under a contract of insurance and treatment of administrative expenses. We noted that when an insurer makes an indemnity payment and the payment is in respect to taxable supply, the insurer shall make a decreasing adjustment as if the amount of indemnity is made up of the premium and value added tax. We also noted that a person who receives a payment under a contract of insurance for recovery of loss incurred in the course of the person’s economic activity; or in relation to an asset used wholly and exclusively in the person’s economic activity; and the supply of the contract of insurance was a taxable supply, shall make an increasing adjustment equal to the amount received multiplied by the tax fraction.

Today’s article looks in detail at decreasing and increasing adjustments in relation to VAT on insurance services.

Decreasing Adjustment on making Payment under a Contract of Insurance

The decreasing adjustment under section 76 of the VAT Act is only available if a person makes a payment under the contract of insurance; and meets all of the following conditions:

• the supply of the contract of insurance is a taxable supply;

• the payment is not made in respect of a supply to the insurer or an import by insurer or an import by the insurer;

• the payment is not made in respect of a supply to another person, unless that supply is a taxable supply on which value added tax is imposed at a rate other than zero; and

• the person to whom the payment is made is a resident or a non-resident who is a registered person.

Here the amount of the adjustment is the tax fraction of the payment made. The adjustment will be included in the VAT return for the tax period in which the payment made.

Increasing adjustment on receiving insurance premium

Increasing adjustments are made when a person receives a payment under a contract of insurance (regardless of whether the person is party to the contract). The payment should be for recovery of loss incurred in the course of the person’s economic activity; or in relation to an asset used wholly and exclusively in the person’s economic activity. Also the supply of the contract of insurance must have been a taxable supply. The increasing adjustment shall be made in the tax period in which the payment is received and shall be equal to the amount received multiplied by the tax fraction. Exemptions in relations to exempt supplies and private use shall also apply.

Adjustments for payments under subrogation

The literal meaning of subrogation is “to stand in place of”. Subrogation is therefore the right of one person to stand in the place of another in the application of the law. In terms of this principle, the person who has subrogation rights is availed all the rights and remedies to which the insured is entitled. The principle of subrogation applies as a way of preserving the principle of indemnity and to prevent the insured party from profiting from any loss arising in terms of a contract of insurance. The insurer’s right to take whatever steps it deems necessary to recover the amount of the loss from the responsible third party, after the insured party has been compensated for that loss. This includes instituting legal action in the name of the insured as it is usually a policy condition that the insurer be provided with the necessary assistance in exercising these rights.