Full Answer
Is the settlement of an insurance claim subject to VAT?
The money paid by the insurer in settlement of the claim is therefore outside the scope of VAT. 5.6 Surrender of goods following an insurance claim In some instances, insurers decide to replace or compensate for damaged goods under an insurance claim rather than pay the cost of having them repaired.
Where can VAT be deducted from an insurance claim?
Where supplies of claims-related goods or services are made to the insured party and the claim relates to their VAT-registered business, any VAT incurred on those supplies may be deducted as input tax subject to normal rules.
What is the VAT on insurance premiums?
VAT is payable at the standard rate on the supply of risk cover in terms of a short-term insurance policy. There are, however, certain instances when the supply of insurance will be subject to VAT at the zero rate. Premiums payable in respect of long-term insurance such as life assurance and endowment policies are generally exempt from VAT.
Is insurance settlement taxable income?
Money you receive as part of an insurance claim or settlement is typically not taxed. The IRS only levies taxes on income, which is money or payment received that results in you having more wealth than you did before.
Is there VAT on insurance claims in South Africa?
Indemnity payments received by a registered vendor from an insurance company are subject to VAT if the loss related to the carrying on of the vendor's enterprise. In other words 14/114 of the amount received has to be paid as output tax to Inland Revenue.
Are insurance proceeds taxable in South Africa?
If you receive an insurance payout of ZAR120,000, you will have a recoupment of ZAR33,333 and a capital gain of ZAR20,000. If you decide to take the money and run (legally, of course) you will have to pay the capital gains tax and the income tax on the recoupment.
Can you claim input VAT on insurance premiums?
Premiums paid - input tax is claimable, subject to normal requirements. Payment in respect of total loss or destruction or damage to assets on which VAT was properly claimable on original acquisition - output tax must he declared and paid over to the Receiver of Revenue.
Is business insurance VAT exempt?
Insurance premiums are not subject to VAT on commercial and personal lines policies. However, please note that tax is still payable in the form of Insurance Premium Tax (IPT).
Can you claim VAT on insurance excess?
Excesses are calculated on a VAT exclusive basis if the claim is percentage based. If the excess is a fixed amount, it should be deducted from the VAT exclusive claim. A VAT input tax deduction should be claimed net of the excess if it is a third-party payment or the supplier is paid.
Why is it important to establish who is receiving supplies made in connection with or in settlement of insurance claims?
It is important to establish who is receiving supplies made in connection with or in settlement of insurance claims because this will determine who could have the right to recover any VAT charged on those supplies as input tax. Guidance on determining who is receiving particular supplies made in connection with insurance claims is given further on in this section in paragraphs 5.2 to 5.5.
What is insurance supplying?
supplying services connected to insurance such as claims handling
Is insurance liable for VAT?
2.1 VAT liability of insurance transactions. Insurance transactions are exempt from VAT. Normally VAT cannot be recovered on goods and services bought in to make exempt supplies, see paragraph 7.1 for more information. Some premiums received under contracts of insurance are liable to IPT.
Where is the place of supply of insurance?
The place of supply of insurance is where the customer belongs. If, you’re an insurer who belongs in the UK, your insurance is supplied in your customer’s country if your customer belongs outside the UK. As an insurer belonging in the UK, your insurance is supplied in the UK, if:
Does the UK have a VAT exemption?
The Court of Justice of the European Union ( CJEU) in the case of Card Protection Plan Ltd ( CPP ), however found that the UK could not restrict its VAT exemption to authorised insurers. This means that insurance supplied by unauthorised insurers is exempt from VAT.
Is a non-insurance warranty liable for VAT?
The supply of a non-insurance warranty by a UK business will be liable to VAT at the standard rate. A business may take out an insurance policy to protect against the risk of there being a shortfall in the fund used to pay for any repairs covered by the warranty.
Is a part paid endowment policy exempt from insurance?
The sale of part-paid endowment policies is not exempt under the insurance exemption because the risk covered by the underlying insurance remains that of the original policyholder. There is a financial transaction taking place and the consideration received is exempt as finance.
Who must declare VAT payment?
Payment in respect of total loss or destruction or damage to assets on which VAT was properly claimable on original acquisition - output tax must he declared and paid over to the Receiver of Revenue.
When an indemnity payout is received for destruction, loss or damage to an asset used in a business enterprise?
on which VAT was properly claimable on acquisition, output tax should he paid to the Receiver of Revenue. This is often not done as the recipient of the claim does not issue a tax invoice and the documentation received from the insurer does not record the obligation of the vendor to disclose such output tax . To exacerbate the problem, claims for major assets are often received piece meal.
Does an insured value include VAT?
Clearly, in order not to be out of pocket following an insurance claim, the insured value must include VAT.
Does the recipient of a claim issue a tax invoice?
This is often not done as the recipient of the claim does not issue a tax invoice and the documentation received from the insurer does not record the obligation of the vendor to disclose such output tax. To exacerbate the problem, claims for major assets are often received piece meal.
Is insurance tax exempt from VAT?
VAT and insurance claims. Insurance transactions are generally VAT exempt. However, there are many issues that can arise concerning the VAT liability of certain insurance transactions. One of these issues concerns the VAT treatment of insurance claims.
Does an insurance company pay the policy holder for VAT?
For this reason, the insurer will normally pay the policy holder compensation exclusive of VAT. This is why most insurance claim forms ask the policy holder if they are registered for VAT. Where the insured party is able to recover the VAT charged the insurer will only be responsible for paying the net amount due.
What are the issues that should be considered in VAT?
These include Claims Payment Made, Claims Payment Received, Trade Payment and Claims Cost, Excess Payment, and Ex-gratia Payment.
What is VAT in South Africa?
The South African VAT system differentiates between Short-Term and Long-Term Insurance, mainly for economic reasons. Short-Term insurance economically comprises consumption and should therefore be subject to a consumption tax such as a VAT. On the other hand, Long-Term Insurance mostly relates to postponed or future consumption and comprises of elements such as the time value of money, savings, investment, etc. Technically Long-Term Insurance therefore does not comprise immediate consumption and should not be subject to a consumption tax such as VAT. The same applies to interest on a loan or investment. The South African VAT system exempts most financial services with a postponed consumption element, and other financial services such as debt and equity supplies, except where these services are supplied cross-border (in extent consumption takes place outside of South Africa). The supplier of exempt financial services is treated as the final consumer for VAT purposes, as it is not allowed to claim related VAT on expenses incurred which becomes a cost.
Why is the legal wording used in contracts of insurance and legal documentation flowing therefrom important?
The legal wording used in contracts of insurance and legal documentation flowing therefrom is very important to a proper understanding of the VAT consequences of the insurance and related matters. For instance, excesses technically do not form part of a contract of insurance and should therefore be afforded specific VAT treatment.
What is VAT Act?
The VAT Act defines many of the terms used throughout the VAT Ac that relate to short-term insurance. It is important to understand these terms as they are necessary for a thorough understanding of the sections dealing with the treatment of insurance, premiums, claims, indemnities, and the like. 2.1 Insurance and Contract of Insurance.
What is indemnification in insurance?
A vendor that receives an indemnity payment in terms of a contract of insurance or is indemnified in terms of a contract of insurance by the payment of an amount of money to another person , that payment or indem nification is, to the extent that it relates to a loss incurred in the course of carrying on an enterprise, deemed to be consideration received for a supply of services performed on the day of receipt of the payment or on the date of payment to the other person , by the vendor in the course or furtherance of his enterprise
What is contract of insurance?
Insurance or guarantee against loss, damage, injury or risk of any kind whatever, whether pursuant to any contract or law, and includes reinsurance; and Contract of Insurance Includes a policy of insurance, an insurance cover, and a renewal of a contract of insurance. Nothing in the definition of insurance apply to insurance for exempt financial ...
Does Lloyd's of London have VAT?
The South African VAT system also differentiates between local and foreign insurers, especially with regards to whether they conduct a VAT enterprise in South Africa. Lloyd’s of London has a special dispensation ingrained in the VAT law. Lloyd’s of London largely has two insurance operating models globally, namely their worldwide business, and cover-holder business. Worldwide insurance business is contractually concluded outside of South Africa, whereas cover-holder insurance business is contractually concluded in South Africa between the local cover-holder and the insured. As a result, the VAT system specifically provides that cover-holders conduct an enterprise in South Africa. Foreign insurers could arguably conduct VAT enterprises in South Africa, irrespective, if they comply with the requirements of a VAT enterprise.
What percentage of VAT should an insurance company pay?
If the business can recover 70% of the VAT in the previous quarter the insurance company should pay them 30% of the VAT – the proportion of the VAT that it can’t claim from HMRC.
What happens if a business is not VAT registered?
If the business is not VAT registered, the insurance company pays the full amount of the claim. If a business incurs legal costs in connection with an insurance claim, it can recover the VAT it is charged provided that the claim is business-related.
What happens if a business is partly exempt?
What if the business is partly exempt? Partly exempt businesses can normally only recover a proportion of the VAT they are charged. This then creates a problem when they make an insurance claim, as the insurance company simply asks them if they are registered for VAT or not.
Can a business recover VAT?
Some goods have a block on the recovery of input tax. For example, if there is any private use of a car at all, the business cannot recover any of the VAT. If a company car is written off and there is any private use , the business should inform the insurance company that it cannot recover the VAT so that they can pay the claim inclusive of VAT.
Does input tax apply to repairs?
The input tax block does not apply to repairs of motor cars. Even if there is mixed business and private use of the car, all the VAT can be claimed from HMRC, so the payment from the insurance company should be net of VAT.
Do small businesses have to include insurance payments in their turnover?
Businesses on the flat rate scheme for small businesses need not include insurance payments in their turnover when calculating the flat rate percentage.
Can an insurance company claim VAT?
If they are registered for VAT, the insurance company will not pay them the VAT element even though they can’t reclaim any or all the VAT. Most claims departments in insurance companies don’t really understand how VAT works, so a partly exempt business should not tick the ‘registered for VAT box’ on the claims form, instead, enclose a note explaining that the business is only entitled to recover a proportion of its VAT and state the percentage of VAT that it was entitled to recover in its last VAT return.
Why should the policy holder and insurer resolve the matter between themselves?
The policy holder and insurer should resolve the matter between themselves if the policy holder is not entitled to make full recovery of input tax. This could be due to non-business use or because the taxpayer is partly exempt. HMRC staff will not negotiate on behalf of either party.
Is VAT a supply or input tax?
Subject to the normal rules a VAT registered policy holder may treat any VAT incurred on the supply as input tax.
Is VAT a compensation for loss?
For VAT purposes payments received by policy holders from insurers are treated as compensation for the loss incurred. They are not consideration for any supply made by the policy holder. In the case of repairs to motor vehicles all the VAT incurred may be claimed as input tax even if there is mixed business and private use of the vehicle.
Does an insurer pay VAT?
The insurer will normally pay the policy holder compensation exclusive of VAT. The policy holder will pay the supplier the tax and recover it as input tax. If an insurance claim is for loss or damage at a domestic property you should make sure that any VAT claimed as input tax relates only to goods used for a business purpose.
Do insurance claims have VAT?
Most insurance claim forms ask the policy holder if they are registered for VAT. The insurer will either make a tax inclusive or tax exclusive payment to the policy holder depending upon the answer. However, answering yes to this question does not establish entitlement to recover input tax on the lost or damaged goods.
