In terms of the Value-Added Tax Act 89 of 1991, Tax Administration Act 28 of 2011, Short-Term Insurance Act 53 of 1998 the Binding General Ruling (VAT) 14 (Issue 2) “VAT Treatment of Specific Supplies in The Short-Term Insurance Industry” (BGR 14) was created which specifies how and when input VAT deductions may be made for short-term insurance payments.
As of 1 September 2016, the Binding General Ruling (VAT) 14 (Issue 2) “VAT Treatment of Specific Supplies in The Short-Term Insurance Industry” (BGR 14) came into effect which specifically relies on Sections 1(1), 7, 8, 9, 11, 16, 20, 21, 54 and 72 of the VAT Act.
For this article, we will highlight the aspects of the BGR’s VAT treatment of the following topics:
- The time of supply in relation to the supply of insurance and related intermediary services.
- International transport insurance including stock throughput.
- Excess payments.
- Indemnity payments.
- Third-party payments.
- Intermediary services.
- Documents accepted as alternatives to tax invoices in respect of the supply of insurance and related intermediary services.
- Approval to issue recipient-created tax invoices, debit- and credit notes.
Time Of Supply
An insurance policy, renewal notice or endorsement that does not notify the insured of an obligation to make payment is not regarded as an invoice and will therefore not trigger the time of supply. In instances where the insurer (or its intermediary) does not issue an “invoice”, the supply of insurance is deemed to be on the date the insurer (or the insurer’s intermediary) receives the insurance premium in respect of that supply.
International Transport Insurance
The supply of insurance under inbound and outbound policies, including insurance cover during periods in which “ancillary transport services” are supplied, may be zero-rated under section 11(2)(d).
Stock Throughput Insurance
The supply of stock throughput insurance is regarded as international transport insurance to the extent that insurance cover is provided in respect of goods transported from an export country to South Africa (and vice versa) as part of an international voyage.
Single Insurance
Premium Insurers that levy a single premium in respect of the single supply of stock throughput insurance relating to both standard and zero-rated supplies are, under section 8(15), required to allocate the premium to the various risk components which were used to determine the premium and to apply the applicable VAT rate to each component. The same ratio must be used with respect to subsequent adjustments to the premium unless the insurer can determine the allocation more accurately. The insurer is required to notify the insured and, where applicable, the intermediary of the original allocation of the premium between the standard and zero-rated portions as well as any subsequent adjustments in respect thereof. The insurer is required to retain proof of such notification.
Excess Payments
Insured Pays Excess Directly to A Third-Party Supplier
The third-party supplier must issue two tax invoices, that is, one to the insured to the extent of the excess payment and one to the insurer to the extent of the trade payment.
The Insurer Pays the Full Amount to The Third-Party Service Provider and Recovers the Excess from The Insured
An excess payment received by an insurer from the insured does not constitute “consideration” as the payment is not received in respect of any taxable supply made by the insurer. The insurer is, however, required to issue documentation to the insured in respect of the receipt of the excess payment which must include the following minimum information:
- The insurer’s name, VAT registration number and address.
- The insured’s name, VAT registration number (where applicable) and address.
- The third-party supplier’s name and VAT registration number (where applicable).
- A full description of the goods or services supplied by the third-party service provider.
- The date on which the third-party service provider made the supply.
- The amount of the excess paid or payable by the insured reflecting either the VAT amount separately or a statement that the amount payable includes VAT and the rate at which VAT was charged.
The insurer is, under section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third-party supplier. The deduction must be calculated as follows:
(Total VAT inclusive amount paid to the third-party supplier less excess received from insured) × tax fraction.
The insured may deduct the VAT incurred in relation to the excess payment made to the insurer. The deduction is calculated as follows:
Excess payment × tax fraction.
An arrangement is made under section 72 to regard the document issued by the insurer to the insured in respect of excess received or due to be a “tax invoice” for the purposes of section 16(2)(a). This arrangement is only applicable if –
- The insured is a registered vendor.
- The third-party supplier is a registered vendor; and
- The insured and insurer obtain and retain the document issued by the insurer in respect of the excess payment.
Indemnity Payments
The input tax deduction allowed under section 16(3)(c) applies not only to indemnity payments made in respect of “indemnity insurance” cover but also in respect of “non-indemnity insurance” such as personal accident and third-party liability cover that may be included in an insurance policy. An insurer making an indemnity payment which gives rise to a deduction under section 16(3)(c) must issue a document to the insured informing the insured of a potential output tax liability that may arise under section 7(1)(a) read with section 8(8). This requirement applies irrespective of whether the insured is a vendor or not.
Recoveries
An insurer is not liable to account for output tax on amounts recovered from a third party or the third party’s insurer under a subrogation claim, irrespective of whether the whole or only a portion of the claim is recovered.
Employer Acting as Agent on Behalf of Employees
The employer, when acting as the agent of its employees in entering a group personal accident insurance contract with an insurer, will not be entitled to deduct input tax in respect of that contract. The employer will not be required to account for output tax under section 8(8) if the employee receives an indemnity payment from the insurer, irrespective of whether the payment is made through the employer or directly to the employee.
Supply Of Insurance
The Commissioner directs, under section 20(7)(a) and 21(5)(a), that the policy document, although not an invoice, is regarded as a tax invoice, debit note and credit note which need not contain the words “tax invoice”, “VAT invoice”, “invoice”, “debit note” and “credit note” provided –
- the insurer retains proof that the insured paid premiums in accordance with the policy document; and
- the policy document reflects all the other information as required by section 20(4); and
- the policy document contains the following statement (or substantially similar wording): “In terms of Binding General Ruling No. 14 this document constitutes a tax invoice, debit note, and credit note as contemplated in sections 20(7)(a) and 21(5)(a) of the VAT Act.”
Supply Of Intermediary Services
The Commissioner directs, under sections 20(7)(a) and 21(5)(a), that the document (generally known as a bordereau) issued by the intermediary to the insurer in respect of the supply of intermediary services does not have to contain the words “tax invoice”, “VAT invoice”, “invoice”, “credit note” or “debit note”, as the case may be, provided the bordereau reflects the other information required by sections 20(4) and 21(3) respectively.
Recipient-Created Tax Invoices, Credit and Debit Notes
An insurer that is required to determine the consideration payable in respect of intermediary services may, under sections 20(2) and 21(4), issue recipient-created tax invoices, and credit or debit notes in respect of the supply of intermediary services.
This approval is subject to –
- the recipient-created tax invoice, credit or debit note complying with sections 20(4), (5), 21(3) or the special approval set out in 2.12, as applicable; and
- the insurer complying with all other requirements listed in Interpretation Note No. 56 “Recipient-created tax invoices, credit and debit notes”.
In addition, permission is granted under sections 20(7)(a) and 21(5)(a) that the bordereau issued by the insurer to the intermediary in respect of the supply of intermediary services does not have to contain the words “tax invoice”, “VAT invoice”, “invoice”, “credit note” or “debit note” (as the case may be).
Conclusion
As can be seen, the legislation governing the deduction of input VAT from short-term insurance payments can become very complex and extend further than simply having the correct supporting documents. It is therefore important to follow the guidelines set out in the VAT421 guide and the BGR 14.
